Challenges in Implementing a Counterparty Risk Management Process
Most banks are in the process of setting up counterparty risk management processes or improving existing ones. Unlike market risk, which can be effectively managed by individual trading desks or traders, counterparty risk is increasingly being priced and managed by a central CVA desk or risk control group since the exposure tends to span multiple asset classes and business lines. Moreover, aggregated counterparty exposure may be significantly impacted by collateral and cross-product netting agreements.

Gathering transaction and market data from potentially many trading systems, along with legal agreements and other reference data, involves significant and often underestimated data management issues. The ability to calculate credit value adjustments (CVA) and exposure metrics on the entire portfolio, incorporating all relevant risk factors, adds substantial analytical and technological challenges. Furthermore, traders and salespeople expect near real-time performance of incremental CVA pricing of new transactions. Internal counterparty risk management must also be integrated with regulatory processes.

In short, the data, technological, and operational challenges involved in implementing a counterparty risk management process can be overwhelming. This paper outlines the key challenges, starting with an overview of the main business objectives, followed by a discussion of data and technology issues, and current trends in best practices.

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A First View on the New CVA Risk Capital Charge

In July 2015, the Basel Committee of Banking Supervision (BCBS) published a consultative paper on credit valuation adjustment (CVA) risk to improve the current regulatory framework. In February 2016, first improvements of this framework have been introduced within the QIS instructions for the QIS based on December 2015 results.


Banks Are Not Ready for Counterparty Risk Elements of Basel lll

Enhancing Counterparty Credit Risk management practices is a key focus for banks. This is in response to changes in accounting rules and new prudential and market regulations, which have tightened substantially following the financial crisis. Collectively, these changes are having a deep impact on the market and the way banks price and manage the risk associated with derivatives.


CVA, DVA and Hedging Earnings Volatility

Credit Value Adjustment (CVA) is the amount subtracted from the mark-to-market (MTM) value of derivative positions to account for the expected loss due to counterparty defaults. Debt Value Adjustment (DVA) is basically CVA from the counterparty’s perspective. If one party incurs a CVA loss, the other party records a corresponding DVA gain.

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