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Are CCPs the optimal answer to managing counterparty risk or are they creating more issues than they solve? There is a recurring question on the nature of Credit Value Adjustment: should the default probability measure applied to CCR be risk neutral or should it be real world (e.g. based on internal or external ratings)? How should FVA be measured and possibly optimized in regards to the Credit Support Annexes? Read More

Clearly the credit crisis had a significant impact on the interest rate markets. These changes have driven a profound shift in the way all OTC products are valued and risk managed with the result being an abandonment of the classic derivatives pricing framework based on single interest rate curves. The old-style no-arbitrage valuation framework has been permanently changed by the credit crisis with the introduction of a new approach that takes into account current interest rate dynamics and market segmentation using multiple curves. Read More

Tiden Capital is a private investment company with over $100 million in assets under management. The firm is focused on relative value and corporate structured credit opportunities, including CDS and CDS index tranche products. Read More

Senior practitioners from across the industry provide their views on the developments and key challenges facing the OTC market. What do you consider as key challenges facing the OTC market going forward?  Read More

The recent crisis highlighted the additional ‘systemic’ risk that the failure of one large institution could cause the failure of one or more of its counterparties, which could trigger a chain reaction. Since Basel III may not explicitly state how some of the new provisions address systemic risk, some analysis is necessary. Quantitative studies have shown limited impact of the higher capital requirements on the real economy, though banks may choose to curtail or exit certain lending businesses if the returns are too low. Read More

Prior to the credit crisis there were small but generally negligible differences between forward rates implied from interest rate products of different tenors. No-arbitrage arguments held and a six-month rate implied from a three-month rate and a three times six-month forward would match. As the credit crisis continued, the market segmented and this previously arbitrage-free relationship broke down. Following the crisis, interest rate modelling has undergone nothing short of a revolution. During the credit crisis, credit and liquidity issues drove apart previously closely related rates.  Read More

Counterparty credit risk (CCR) is currently one of the most complex topics for financial institutions primarily due to its multiple definitions and uses. Therefore, the first question to ask yourself before modeling CCR, is why do you want to measure it?

CCR is the risk that a party, usually to an OTC derivative contract, may fail to fulfill its obligations, causing replacement losses to the other party. This is similar to the standard definition of credit risk in the sense that the economic loss is due to the default of the obligor. Read More

KLP Kapitalforvaltning AS is the asset management subsidiary of KLP, one of Norway’s largest insurance companies, KLP provides insurance to municipalities and public sector businesses with 320 billion NOK under management. KLP is mutually owned by its customers and have over 800 employees.  Read More

Buy-side firms face a rapidly changing operating environment. They need not only to comply with the regulations, but also to adapt to a new marketplace. The new goal is a performance-oriented trade and risk management execution strategy for asset allocation with a strong focus on stress-testing and scenario analysis. Read More

Varden Pacific LLC is a San Francisco based investment manager that was founded in 2010, launched its flagship fund in April 2011 and currently manages over $200 million in its core strategy. Varden is focused on capitalizing on niche opportunities and residual dislocations within the structured credit markets, specifically within corporate-backed structured credit.  Read More