Counterparty Risk - Exposure Measurement, Mitigation and Credit Valuation Adjustment
Dates:
March 25 - 26, 2010
March 25 - 26, 2010
Location:
Prague, Mövenpick Hotel
Prague, Mövenpick Hotel
Price:
EUR 1,500
EUR 1,500
Lecturer:
Søren Plesner
Søren Plesner
- Counterparty Risk and the Financial Crisis
- Measuring Current Exposure
- Measuring Potential Future Exposure
- Transactional and Close-Out Netting
- Collateral Management and Margin Agreements
- Regulatory and Economic Capital for CP Risk
- Credit Valuation Adjustment of OTC Derivatives Portfolios
- The Move to Centralized Trading, Clearing and Settlement
At this seminar, we shall give you a good and practical understanding of methods and tools for measuring, pricing and managing the complex credit exposures that arise from transactions in OTC derivatives, security financing and various off-balance arrangements.
We start with general introduction to counterparty risk. We contrast this type of risk with traditional lending risk, we give an overview of developments in credit risk transfer, and we give examples of transactions that give rise to counterparty risk exposure. We also present and discuss a number of case studies involving counterparty failures.
We then look at how counterparty risk can be identified and measured. We explain how “current exposure” (replacement value) and “potential future exposure” can be quantified using an integrated model for market and credit risk. We discuss data requirements, and we demonstrate how analytical models and simulation techniques can be used to generate loss distributions and to calculate Expected Exposure (EE), Expected Positive Exposure (EPE) and other important analytics.
Further, we explain how counterparty risk can be effectively managed. Methods include active counterparty credit monitoring, use of counterparty position limits, margining and the use of collateral. We also explain how “dynamic credit default swaps” can be used to mitigate risk, and we discuss the legal and operational risks that arise from using collateral and other arrangements. We explain and demonstrate how regulatory and economic capital charges for counterparty risk can be assessed and how capital can be effectively allocated to individual business units. We explain and demonstrate how portfolios of OTC derivatives are “credit valuation adjusted” to take into account the relative credit qualities of the counterparties and how these adjustments should be taken into account in derivatives pricing.
Finally, we give an overview of regulatory and industry developments towards creating a better infrastructure that should lead to a reduction in counterparty and systemic risk. Initiatives include clearing facilities for OTC derivatives, improved accounting standards, and enhanced monitoring and risk management, and strengthened capital standards.
We start with general introduction to counterparty risk. We contrast this type of risk with traditional lending risk, we give an overview of developments in credit risk transfer, and we give examples of transactions that give rise to counterparty risk exposure. We also present and discuss a number of case studies involving counterparty failures.
We then look at how counterparty risk can be identified and measured. We explain how “current exposure” (replacement value) and “potential future exposure” can be quantified using an integrated model for market and credit risk. We discuss data requirements, and we demonstrate how analytical models and simulation techniques can be used to generate loss distributions and to calculate Expected Exposure (EE), Expected Positive Exposure (EPE) and other important analytics.
Further, we explain how counterparty risk can be effectively managed. Methods include active counterparty credit monitoring, use of counterparty position limits, margining and the use of collateral. We also explain how “dynamic credit default swaps” can be used to mitigate risk, and we discuss the legal and operational risks that arise from using collateral and other arrangements. We explain and demonstrate how regulatory and economic capital charges for counterparty risk can be assessed and how capital can be effectively allocated to individual business units. We explain and demonstrate how portfolios of OTC derivatives are “credit valuation adjusted” to take into account the relative credit qualities of the counterparties and how these adjustments should be taken into account in derivatives pricing.
Finally, we give an overview of regulatory and industry developments towards creating a better infrastructure that should lead to a reduction in counterparty and systemic risk. Initiatives include clearing facilities for OTC derivatives, improved accounting standards, and enhanced monitoring and risk management, and strengthened capital standards.
13.00 - 16.30 Measuring Counterparty Risk
- Identifying Counterparties, Positions and Netting Sets
- Data Requirements for Measuring Counterparty Exposure
- The Add-on Method
- The Basel CEM and the standardized approach
- Calculating Current Exposure + add-on: Examples
- Calculating RWA and regulatory capital charge under the CME and the standardized approach
- Modelling Potential Future Exposure
- Monte Carlo simulation engines
- Trade pricing
- Exposure calculators
- Reporting tools
- Calculating EE, Effective EE, EPE and Effective EPE
- Examples, Simulations and Small Exercises
Friday, March 26
09.00 - 09.15 Brief recap
09.15 - 12.00 Managing Counterparty Risk
- Active Counterparty Credit Monitoring
- Use of Counterparty Position Limits
- Trade Approvals Against Credit Line Limits
- Early Termination of Deals
- Netting
- Transactional vs. close-out netting
- Levels of netting
- Legal framework: ISDA Master Agreement and supporting documents
- Events of default and termination events
- Calculation of amount
- Collateral Management
- How margins and collateral may reduce CP risk
- ISDA “Credit Support Annex”
- Data and systems requirements
- Legal and operation risks
- Collateralisation practices: a Global Assessment (ISDA 2009 survey)
- Modelling Collaterized Exposure
- Monte Carlo procedure
- Shortcut method
12.00 - 13.00 Lunch
13.00 - 16.00 Managing Counterparty Risk (continued)
- Hedging CPR Risk with Dynamic Credit Default Swaps
- Using Structured Products
- Allocating Capital for Counterparty Risk (Basel II + Economic Capital)
- Market Valuation of Counterparty Risk Exposure
- Credit Valuation Adjustment – why?
- CVA – how?
Regulatory and Industry Initiatives to Reduce Systemic Risk through Improved Market Infrastructure
- US and European Regulatory Initiatives
- Clearing OTC Derivatives through Central Counterparties (CCPs)
- New Developments in Clearing and Settlement Arrangements for OTC Derivatives
- ISDA “Big Bang” Protocol for Streamlining CDS Settlements
- Outlook: Will a New Financial Architecture Prevent Futures Crises?
Evaluation and Termination of the Seminar
