FINCAD, the leading provider of OTC derivatives and risk solutions, hosted an information session on December 5th to discuss the impact of credit support annex (CSA) collateralization on derivative valuation. Led by Justin Clarke, founder of financial risk management training and consulting company Edu-Risk International, the session brought to light the changing nature of derivative products and how this has affected the financial marketplace.
A significant rise in the amount of collateral in circulation in comparison to prior years has fuelled the growing need for accurate collateral management, especially for credit derivatives, of which 93% are collateralized. The increasing complexity of derivative instruments means that valuation practices are constantly evolving. Derivative valuation is changing as a result of CSA and collateralization effects, including collateral substitution and rehypothecation, as well as funding value adjustment (FVA) and regulatory changes.
“We are pleased to have the opportunity to host an event like this. With regulations gradually taking shape, a lot of participants are still trying to figure out the best practices they should follow and what they need to do to navigate through the uncertainty,” commented Bob Park, President and CEO, FINCAD. “Transparency, accountability and more precise risk measurement are becoming increasingly important, so it is essential for finance professionals to learn in more detail how these new practices and conventions will affect them.”
“With over 25 years of experience in the financial industry, I have seen more developments in derivative pricing in the past five years since the financial crisis, than in the 20 years prior. The methods required to price even the most simple of swaps have undergone fundamental change. The joint impacts of credit risk, interest rate basis and collateralisation have necessitated these revisions. New regulations and increasingly complex calculations will increase the demands made on institutions to correctly value and report on their derivative exposures in an accurate and timely manner to maintain competitiveness,” says Justin Clarke, Principal, Edu-Risk International.
As evidenced by strong attendance of finance professionals from both the buy-side and sell-side, the market is eager to uncover information on the evolving trend of CSA collateralization. For more information about FINCAD's Multi-Currency CSA solution, visit FINCAD’s website.