The credit crisis and regulatory responses have forced banks to substantially update their counterparty risk management processes. New regulations in the form of Basel III, the Dodd-Frank Act in the U.S. and European Market Infrastructure Regulation (EMIR) have dramatically increased capital requirements for Counterparty Credit Risk. In addition to implementing new regulatory requirements, banks are making significant changes to internal counterparty risk management practices.
There are three main themes inherent in these changes. First, better firm-wide consolidated risk reporting has become a top priority. Second, centralised counterparty risk management groups (CVA desks) are being created to more actively monitor and hedge credit risk. Third, banks are making significant investments in technology to better support the firm-wide risk reporting and CVA desk initiatives.
This paper will explore some of the key changes to internal counterparty risk management processes by tracing typical workflows within banks before and after CVA desks, and how increased clearing due to regulatory mandates, affects these workflows. Since CVA pricing and counterparty risk management workflows require extensive amounts of data, as well as a scalable, high-performance technology, it is important to understand the data management and analytical challenges involved.
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