Whitepapers

As a recognised thought leader, Quantifi regularly publishes whitepaper and articles that offer valuable insight and sharing of best practices on key topics related to capital markets

 

January 2016

Comparing Alternate Methods for Calculating CVA Capital Charges Under Basel III

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co-authored by Jon Gregory, Solum Financial Partners

The global financial crisis brought counterparty credit risk and CVA very much into the spotlight. The Basel III proposals first published in December 2009 introduced changes to the Basel II rules and the need for a new capital charge 'CVA VaR' against the volatility of CVA. There are two ways for banks to compute CVA VaR, so-called standardised and advanced methods, which depend on their current regulatory approval with respect to other aspects. Furthermore, there is the potential to reduce the capital charges via eligible hedges. This whitepaper explores the capital charges under the two regimes and the capital relief that can be achieved.

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OIS and CSA Discounting

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by Quantifi

Prior to the credit crisis, interest rate modelling was generally well understood. Following the crisis, interest rate modelling has undergone nothing short of a revolution. This whitepaper covers the new generation of interest rate modelling based on overnight index swap (OIS) discounting and integrated Credit Valuation Adjustment (CVA) and how this new framework requires a rethink of derivative modelling from first principles and presents significant challenges for existing valuation, risk management, and margining systems.

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How the Credit Crisis Has Changed Counterparty Risk Management

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by Quantifi

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, Dodd-Frank 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. This whitepaper explores 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.

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Challenges in Implementing a Counterparty Risk Management Process

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by Quantifi

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. Read about best practices in implementing a counterparty risk management framework and the data, technology and operational challenges.

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CVA, DVA and Hedging Earnings Volatility

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by Dmitry Pugachevsky, Quantifi

Accounting rules mandate the inclusion of CVA in MTM reporting, which means bank earnings are subject to CVA volatility. DVA is also accepted under the accounting rules and banks that include it, and by doing so must continue to include it going forward, add their own credit spread as a source of earnings volatility. The whitepaper provides an overview of DVA and highlights some of the results reported by larger banks, along with potential implications going forward.

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The Evolution of Counterparty Credit Risk

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by Quantifi

Counterparty credit risk theory and practice has been developing for over a decade with risk management evolving from passive risk quantification to active management and hedging. Banks today tend to be distributed along the evolutionary timeline by size and sophistication where global banks have converged to the consensus model whilst smaller and more regional banks, together with other financial institutions such as asset managers are closer to the beginning stages. This whitepaper traces the evolution of counterparty credit risk and explores practical implementation issues, how approaches have converged and provides an insider’s view from major banks that have influenced this market.

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CVA, DVA and Bank Earnings

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by Dmitry Pugachevsky, Quantifi

The whitepaper provides an overview of DVA and highlights some of the results reported by larger banks, along with potential implications going forward. Most banks reported large DVA gains for Q3, offset to some extent by CVA losses, however, because bank spreads moved relatively wider, DVA was significantly higher than CVA. The paper covers the relationship between DVA and CVA, the Q3 DVA results for the five largest U.S banks including the increases in their respective CDS spreads that drove these gains and how some banks hedge DVA in order to reduce earning volatility. 

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