Counterparty Risk - Exposure Measurement, Mitigation and Credit Valuation Adjustment

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Counterparty Risk – General Introduction and Overview

• Contrasting Lending Risk with Counterparty Risk
• Counterparty Risk and the Global Credit Crisis
• Examples of Transactions that Expose Parties to Counterparty Risk
  • OTC derivatives
  • Securities lending and securities financing transactions
  • Liquidity facilities and other off-balance commitments
• Counterparty Risk Case Studies
  • Bank Herstatt, Lehman Brothers, AIG, KfW

Measuring Counterparty Risk

• Counterparty Risk – Building Blocks
• Exposures Definitions
  • Current Exposure (CE)
  • Potential Future Exposure (PFE)
  • Expected Exposure (EE)
  • Expected Positive Exposure (EPE)
  • Right-way/wrong-way exposures
• Approaches to Estimating PFE Profiles
  • ISDA – TBMA – LIBA Recommendations
• Basel I + II Minimum Capital Requirements for CP Risk

12.00 - 13.00 Lunch

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

Day Two

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