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Although the recent crisis has brought a heightened focus, counterparty credit risk theory and practice have been evolving for over a decade. Initially banks addressed the problem from their traditional financing experience while investment banks approached it from a derivatives perspective.
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.
Basel III substantially raises the amount and quality of core Tier one capital from 2% to 7%, plus introduces an additional countercyclical buffer of up to 2.5% and a discretionary surcharge for ‘systemically important’ institutions, i.e., the big dealers.
In cases where counterparties, e.g. prime brokers, do not post collateral and CDS protection is prohibitively expensive, hedge funds tend to manage credit risk through counterparty selection.
There is no question that technology investment is increasingly a strategic rather than an operational decision. The question is not whether to use technology, but rather which one to use.
Counterparty risk management is critical to commodity businesses and optimization of this process helps them grow the business with greater transparency of data and automated processes.
Quantifi has a unique depth of experience delivering tailored and complex enterprise risk solutions to some of the world’s most sophisticated institutions, including leading global banks.
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