- Examines approaches taken by banks when setting limits and monitoring exposures
- Outlines processes and system requirements for measuring and managing exposures and CVA
- Addresses the evolution of regulatory capital requirements in response to Basel regulation
- Discusses the ‘top-down’ approach to risk management now considered a best practice
Quantifi, a leading provider of analytics, trading and risk management solutions for the global OTC markets, and InteDelta, a consultancy which specializes in advising financial institutions on how to manage their risk, have published a joint whitepaper titled ‘Measurement and Management of Counterparty Risk.’
“As this paper explains, the accurate measurement and effective management of Potential Future Exposure (PFE) and Credit Value Adjustment (CVA) are critical for managing counterparty credit risk,” comments Avadhut Naik, Global Product Manager, Quantifi. “The ability to calculate CVA and exposure metrics on an entire portfolio, incorporating all relevant risk factors and the dynamics between them, adds substantial analytical and technological challenges.”
The measurement and management of counterparty risk is a rapidly evolving area. A range of new regulatory requirements is changing the way in which institutions view risk. This affects not only risk quantification but the whole commercial model of an institution. New regulations or risk measures can affect the commercial attractiveness of an institution’s existing product range or client profile. Against a backdrop of discipline in constant evolution, this whitepaper explores some of the key areas associated with the management and measurement of counterparty risk.
Topics explored in the whitepaper include:
- The importance of banks to define their approaches when setting limits and monitoring exposure, taking into account the frequency of review and the process for ensuring limits are properly recorded
- The data, technology and operational systems and processes necessary for effectively measuring and managing exposures and CVA
- How the calculation of regulatory capital requirements has evolved in response to Basel regulatory requirements
- Banks adopting a ‘top-down’ approach to risk management and establishing active CVA functions as market best practices
“We are living through an era of rapid change in the field of counterparty risk management, much of it driven by new regulation. Banks need to invest in their operating models, methodologies and systems to ensure they meet evolving best practice and the expectations of their regulators,” said Michael Bryant, Managing Director of InteDelta.