Solution for low default portfolios including hedge fund exposures

Toronto, Canada and London, UK – 18 September 2007

Algorithmics today announced that its Algo Credit Advisory practice has completed the first in a range of planned methodological templates to model the credit risk associated with low default portfolios. The initial template covers hedge funds.

Dr. Colin Farquhar, Managing Director of the Algo Credit Advisory practice commented: ‘Banks around the world are facing significant challenges in preparing for Basel II, particularly in relation to internal rating methodologies. There are particular difficulties associated with traditionally low default loan portfolios, such as lending to hedge funds, especially where the counterparties may have no existing assessment of the quality of the underlying assets.

‘To assist banks in assessing the credit risk underlying these loans in a consistent and verifiable way, we are developing a number of templates, using methodologies based on our extensive credit risk knowledge, credit risk assessment methodologies from Fitch Ratings and the wide range of clients we have advised on other aspects of Basel II in the past.

‘These templates allow banks to align theory with reality, whilst satisfying regulatory reviews. The first template covers the credit risk banks take when lending to hedge funds. One of the main advantages of this template approach is to force consistency and clarity in a bank’s internal rating methodologies, thus facilitating improved back testing of predicted credit ratings. Basel II regulations ideally require seven years of historical data, whereas for the instruments underlying some low default portfolios, there is little market recognized data available.’

The Algo Credit Advisory team will tailor these templates to an individual client’s requirements, in order to check the client’s existing internal rating procedures, or to provide a consistent framework to calculate credit ratings where such rating data does not already exist. The low default portfolio templates can be used in conjunction with other Algorithmics’ software solutions or with a client’s internal software. Further templates under development cover brokers and insurance companies, with more to follow later.

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