Counterparty Risk Management Workflows
Quantifi explores the challenges and trends in counterparty risk management by tracing typical workflows within a global bank before and after CVA desks, and how increased clearing affects these workflows

CVA pricing and counterparty risk management workflows require extensive amounts of data, as well as a scalable, high-performance technology infrastructure. Whilst the most sophisticated global banks have targeted the CVA and clearing workflows and supporting technology infrastructure, it is expected that regional banks will follow suit over the next few years in order to manage risk more effectively and comply with new regulations.

Trends in Counterparty Risk Management Workflows

  • Counterparty Risk pre-CVA Desk
  • Counterparty Risk with CVA Desk
  • Clearing
  • Data & Technology Challenges



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.


Measurement and Management of Counterparty Risk

The measurement and management of counterparty risk is in the midst of a revolution. Within recent memory of most counterparty risk managers it all used to be so much simplier. Limits were set on the same basis as traditional lending, and the exposure measured against those limits was quantified using simple add-on factors applied to the notional of each transaction. Regulatory capital was based on the simple methodology specified under Basel I.


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.

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