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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

Channel Capital Advisors LLP (CCA) is a UK based investment manager focusing on credit risk and structured finance transactions.  CCA was established in 2006 by its founders and a consortium of European commercial banks. In 2007, CCA launched Channel Capital PLC (CC PLC), an Irish based operating company.  Read More

It has been reported in several industry publications (e.g., CreditFlux, Reuters, Derivatives Week Online) that the CDS market is likely to switch to a fixed coupon basis with upfront points. This change will lead to some fundamental changes in the risk profiles of these contracts, and in particular will affect how they can be used in hedging spread and default risk. This Learning Curve article will explore some of the most basic changes that participants in the credit markets will need to keep in mind. Read More