Risk management systems for sell-side institutions cover a range of capabilities across different categories of risk such as liquidity, market, credit and operational risk. They are required to support a broad range of asset classes, as well as a variety of risk analytics including both pre-deal and post-trade analytics. Sell-side risk management involves front, middle and back office operations.
As a recognised thought leader, Quantifi publishes whitepapers and articles that offer valuable insight on key topics related to the financial markets.
In the last few years, the financial markets have undergone a dramatic change. While some of this is down to natural evolution, much of the change can be directly attributed to new rules introduced in the wake of the 2007 crisis. Regulators, legislators and central bank governors have been determined to avert another bubble bursting or an unexpected event that could threaten markets.
This whitepaper explores the challenges, risk factors, calculation techniques, and concepts for measuring financial instruments under IFRS 13. It examines the effect of CVA and DVA on hedge effectiveness, the different approaches for testing hedge effectiveness and best practice for inclusion or exclusion of CVA and DVA in setting up hypothetical derivatives.
IFRS 13 “fair value measurement” became effective 1st of January 2013. The International Accounting Standard Board (IASB) issued IFRS (International Financial Reporting Standards) 13 in May 2011 to improve the consistency of fair value measurements.
Interest on the topic of Funding Valuation Adjustment (FVA) was renewed, particularly in light of the JPMorgan’s Q4 2013 earnings report, which for the first time included FVA.
In response to the financial crisis, global regulators unleashed a tsunami of regulatory guidance, initiatives, standards, and rules, including Basel 2.5, 3, MIFID, EMIR, MIFIR, IOSCO, Solvency II, CRD IV, UCITS, AIFMD, and the Dodd-Frank Act, which alone includes over 2,000 pages of rules and 16 major areas of reform.These regulations and the shifts in markets have hit buy-side firms as much as their sell-side counterparts and have created considerable uncertainty.
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.
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.
The objective of this research paper is, first, to bring some clarity on how to deal with Counterparty Credit Risk (CCR) in the current financial environment by detailing some of the multiple aspects and challenges involved. Secondly, the goal of this document is to study the conditions for the effective risk management of CCR. This will be achieved by detailing and comparing capital requirements, identifying inconsistencies in prudential regulations and applying the various capital approaches on some typical portfolio strategies observed within financial institutions.
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