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

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.

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.

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. 

by Quantifi

One of the key shortcomings of the first two Basel Accords is that they approached the solvency of each institution independently. The recent crisis highlighted the additional ‘systemic’ risk that the failure of one large institution could cause the failure of one or more of its counterparties, which could trigger a chain reaction. Basel III addresses this issue in two ways. Firstly by significantly increasing capital buffers for risks related to the interconnectedness of the major dealers. Secondly by incentivising institutions to reduce counterparty risk through clearing and active management (hedging). Since Basel III may not explicitly state how some of the new provisions address systemic risk, some analysis is necessary.

by Dmitry Pugachevsky, Quantifi

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. This typically entails choosing the counterparty with the lowest aggregate current exposure (mark-to-market value) for the next OTC transaction. The problem with this approach is that it doesn’t take into account the potential level of current exposure on future dates. This whitepaper will step through an example where choosing a counterparty with lower current exposure can result in greater counterparty risk.

 by Robert Goldstein, Quantifi

The financial service industry has changed significantly over the last decade. This rapidly changing environment requires significant investments in technology. There is no question that technology investment is increasingly a strategic rather than operational decision. The question is not whether to use technology, but rather which one to use. Is it better to attempt to build a proprietary application or is a vendor system the more viable and sensible option?