InteDelta, a risk management consultancy, has collaborated with Murex to produce an industry research White Paper titled “CVA and Counterparty Risk Management: a survey of management, measurement and systems”. The paper presents the results of a survey that looks to establish the management processes, measurement and systems that banks use to control counterparty risk paying particular focus on two important metrics in counterparty risk: Potential Future Exposure (PFE) and Credit Valuation Adjustment (CVA). 19 banks participated in the survey from a broad spread of geographies and sizes, ranging from some of the largest investment banks to small regional players.
Key points from the survey:
- The unclear/evolving regulatory landscape is the biggest challenge cited by banks in implementing their counterparty risk/CVA platforms. Data issues were the second biggest challenge
- The new standardised approach for measuring counterparty risk recently issued by the BIS will force banks off more simplistic measures of regulatory capital measurement and may prompt more banks to move directly to the Internal Model Method
- Half of surveyed banks have already established a CVA desk. Majority of remainder have plans to do so
- Just under half of surveyed banks carry out some form of CVA hedging. The absence of liquid Credit Default Swaps for many counterparties prevents more extensive use of hedging
- Advances in counterparty risk/CVA require major investment in systems platforms. Despite the synergies between CVA and counterparty exposure only 17% of banks use the same platform. We expect this to increase over time.
Michael Bryant, Managing Director, said “Banks have had to adapt to enormous changes in the area of counterparty risk and that change is still ongoing. It was not therefore surprising that our survey uncovered wide areas of differences in practices amongst the surveyed banks. Whilst it is generally true that the largest western banks have the most sophisticated practices, we identified many smaller institutions with well developed practices and some larger banks which did not have the controls and practices that might have been expected. I doubt that we are heading for a completely homogenised set of practices around counterparty risk and CVA – each institution needs to choose the practices that are most appropriate to its business and risk culture.”
Alexandre Bon, Head of Enterprise Risk Management Research, said “Six years after the Global Financial Crisis, Counterparty Risk Management still is at the top of the agenda for most financial institutions, regardless of their size, geography and business model. As firms are grappling with the implications of an unprecedented regulatory overhaul and the accompanying transformations of OTC derivatives markets, we have been working very closely with our customers to help them address the joint challenges of Basel 3 compliance, CVA management, XVA management, risk control and collateral management. As the survey clearly highlights, there is no "one size fits all" solution, but some common themes emerge. Building up a holistic yet evolutive system infrastructure will certainly help address the most pressing concerns respondents voiced around data management, risk modeling and developing new business processes that span over traditional business silos."