Quantifi, Ernst & Young and PRMIA recently hosted a joint seminar in London on Managing Counterparty Risk & Basel III. Over 120 senior traders and chief risk officers from global and regional banks who attended the seminar were surveyed about their approaches toward Counterparty Credit Risk and Basel III.
In this article, Dmitry Pugachevsky, Director of Research, analyses the results of this survey and discusses whether banks are ready for counterparty risk elements of Basel lll. Basel III significantly changes the way in which financial institutions address counterparty credit risk (CCR) and credit value adjustment (CVA). 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.
Measuring counterparty exposure requires accurately modelling of the trade terms, CSA terms, collateral, and right or wrong-way risks across all OTC trades within a bank. This presents significant computation challenges for accuracy, performance and scalability. Models not only need to match industry best practice, they need to be transparent, easy to calibrate, high performance, and scalable.