quantifi whitepaper_how the credit crisis has changed counter party risk management

8/2/2019 Quantifi Whitepaper_How the Credit Crisis Has Changed Counter Party Risk Management

1/12

www.qaifi.m

Ad David K (Qaif)

Kehaetiteralterpartrikaaeetpree

Hwireaelearietrelatraate

affetwrkw

Keataatehlhallee

WHITEPAPERHoWTHEcREdITcRIsIsHAscHAngEdcounTERPARTyRIsKmAnAgEmEnT


2/12

David K

daviKell,diretrfcreitPrt,Qati,brialt20

earfexperieeaatraer,qat,atehlittQati.

Hehaprevilheleirpitiatefthelaretaial

itittiilicitirp,JPmrachae,AIgacsFB.

Atcitirp,hewatheeirreittraertheglbalPrtfli

optiiatiek,repiblefrativelaaithereitriki

erivativepiti.Prirtthi,heratheJPmrachaeglbal

Aaltirp,wherehewarepiblefrfrt-fepriiel

arikaaeettlfrthelbalerivativetraiek

ilitherrtcVAte.AerlleeberfthesietfAtarie,mr.Kell

hlaB.A.ieiaatheatifrclateuiveritahapleteraate

wrkiatheatiatclbiauiveritacareiemell.

About the Author


3/12

IntroDuctIon

Thereitriiarelatr

repehavefrebakt

btatiallpatetheirterpart

rikaaeetpree.

newrelatiithefrfBaelIII,the

d-FrakAtitheu.s.aErpea

marketIfratrtreRelati(EmIR)have

raatiallireaeapitalreqireet

frterpartreitrik.Iaitit

ipleetiewrelatrreqireet,

bakareakiiiathaetiteral

terpartrikaaeetpratie.

Therearethreeaitheeiheretithee

hae.Firt,betterr-wieliaterik

reprtihabeeatppririt.se,

etralizeterpartrikaaeet

rp(cVAek)arebeireatetre

ativelitraheereitrik.Thir,

bakareakiiiativeteti

tehltbetterpprtther-wierik

reprtiacVAekiitiative.

Thipaperwillexplreefthekehae

titeralterpartrikaaeet

preebtraitpialwrkwwithi

bakbefreaaftercVAek,ahw

ireaelearietrelatraate,

affettheewrkw.siecVApriia

terpartrikaaeetwrkwreqire

exteiveatfata,awellaaalable,

hih-perfraetehl,itiiprtatt

ertatheataaaeetaaaltial

halleeivlve.

cVAekhavebeeevelpeirepetrii-riverelatifriprveterpartrikaaeet.Hw

theeetralizerpifferfrtraitialapprahetaaeterpartrik,awhattpefataa

aaltialhalleethefae?


4/12

cVAekrpeializeriktrl

rptakewithreativel

aaiterpartrikare

beireprevalet,iebak

thathatheeerallfarebetter

ritherii.

Tetablihabaifrpari,iti

iprtattreviewterpartreitrik

priiapt-traerikaaeetbefretheavetfcVAek.Theaewherea

rpratee-erheeabierik

thrhaerivativetraatiprviea

eflexaple.

Therpratetrearerawatthee

reeivableiafreirrerlkithe

frwarpriefaitipt.Ather

traatiiaiteretratewap

etvertxeratebiebtherpratiitatertitiateiteret

raterik.Iallftheeae,therprate

trearerexplaitheheibjetivetthe

bakerivativealeper,whtrtre

aapprpriatetraati.Thealeper

reqetapriefrthetraatifr

therelevattraiek,whihprviea

petitivearketpriewithreita

apitala-tvertheptetiall

iftheterpartweretefaltprirt

atritfthetrat.Thereitaapital

harearebaeaiteralqalitativea

qatitativeaeetfthereitqalitftheterpartbthebakreitfer.

Thereitprtifthehareifrtheexpetel,i.e.,thetfibiewithrikterpartie.ItiaaltcVA,exeptthatthecVAibaearketiplieipt,ilireitprea,iteafhitriallraqalitativeaali.

Theapitalprtiifrtheptetialexpetel.Thiialreferretaeiapital,whihtraitiallhabeebaehitrialexperieebtiireailbeiallatewitharketiplieipt.Theehareitareervefetreibretraiekfrterpartreitleaeerallerethelvefthebak.

Thetraertheekwrkwiththerik

trlrp,whihaethetraatiiftheexpreliitwiththatpartilar

terpartihit.otherwie,itprviethe

reitaapitalhareiretlrthetl

tallwthetraertallatethe.Therik

trlrpalprvieexprereprt

areqireapitaletritthebak

relatr,whihapprvetheapitalallati

ethl,aititrikaaeet

preeaitritiexprea

apitalreervearittheBaelielie.

beore cVA DesKs

Bakareakiiiativetetitehltbetterpprttherwierikreprtia

cVAekiitiative.


5/12

Corporate Treasury

Exchanges & DealersBank Treasury (funding)

CollateralManagement

Bank Derivative Sales

Derivatives Trading Desk

Risk Control

Bank Regulator

Derivatives Transaction

Derivatives Pricing

MarketRisk

Funding

Credit & CapitalReserves

Regulatory Capital

& Reporting

CollateralRisk

Whileterpartrikiaaethrh

reerveithiexaple,thearketrikfthetraatiifllheebtheek

exhaerwiththerealer.Ifthe

traatiillateralize,thebak

trearprviefifrwhatieffetivel

alattheterithefrfaerivative

liefreit.seprtiftheexpre

aalbellateralize,iwhihaethere

areaitialperatialwrkwar

llateralaaeet.

Tetablihabaifrpari,itiiprtattreviewterpartreitrikpriiapt-traerikaaeetbefretheavetfcVAek.

counterpArty rIsK WorKloW beore cVA DesKs


6/12

cVA DesKs

oeftheriverfrcVAekwatheeetreereitrik,i.e.,freeapaitareleaereerve,bak

lrebie.

Ithelate1990aearl2000,ithewakef

theAiaaialrii,bakftheelve

earapaitawerelkifrwat

reeterpartrik.sebakattepte

teritizeare-itribteit,aiJPmra

Bitrtraati.Atherapprahwatheeterpartrikitherelativelew

cdsarket.

Thereetiteratial(2005)au.s.(2007)

atirleaatitheilifcVA

itheark-t-arketvalatiferivative

pitiprvieaitialipetfrre

preielqatifiterpartrik.se

bakatteptetativelaaeterpart

riklikearketrik,heialltheerlirikfatrfthecVA.givetheplexitf

cVApriiahei,theerepibilitie

haveireailbeeliatewithi

peializecVAek.nw,withtheireae

apitalharefrterpartefaltriker

BaelIIIatheewcVAVaRhare,therei

evereietivetipleetcVAek.

WithacVAek,tfthetraiwrkw

itheaeexeptthecVAekiierte

betweetheerivativetraiekathe

riktrlrp.Iteafittherik

trlrpfrthereitaapitalhare,

thetraerreqetaarialcVApriefr

thecVAek,whihbaiallattthe

cVAekellireitprtetithat

terpartttheerivativeek.Thiia

iteraltraatibetweethetwek,

whihabeithefrfatietreit

efaltwap(ccds).ThecVAhareipae

ttheexteralrprateterbaiapreatthereeivelefthetrae.ule

thecVAifllhee,whihilikel,the

preaharettheterhlal

ileeprtifeiapitalt

atfrcVAVaRaptetialexpete

lfrefalt.

siereitrikpavirtallallaetlae,

thecVAekaealwithltipleiteral

traiek.Theriktrlrptreatthe

cVAeklikethertraiek,ipi

trailiitaitriarketriki

traitialeitivitetriaVaR.ThecVA

ekexetereitaarketrikhee

exhaerwiththerealerareliethe

bakiteraltreartfpiti.Tthe

extetthecVAekattepttfllrepliate

(hee)cVA,whiletheerivativeekal

heetheerliarketrik,thereabe

eiefieieetverlappihee.

ThekeivatiitrebcVAeki

qatifiaaaiterpartreit

rikliketherarketrik,iteafreli

lelreerve.Theaihalleeithatt

allcVArikabeheeetifiet

cdsliqiitaheeablerrelatia

bairik.Therefre,ereerve-baerik

aaeetiaviable.Baetreathetp-tierbak,theptiallti

ivlveheiahftherikapible,

ierithetfrebalaiheei

ahihlpetitivecVApriitext,a

thereliexperieetraerwell-vere

itrtrereitprbletaaethe

reialexpre.


7/12

WiththeireaeapitalharefrterpartefaltrikerBaellllatheewcVAVaRhare,thereievereietivetipleetcVAek.

Corporate Treasury





Bank Regulator

CVA Desk

Risk Control


Derivative Pricing

Marginal CVA Price

Exposure Limits

MarketRisk

Funding

Funding

CollateralRisk

Regulatory Capital& Reporting

Credit Risk

counterpArty rIsK WorKloW WIth cVA DesK


8/12

cleArIng

ThepreiatiewithcVA

ekarethattheiertather

peratiallaeritthewrkwa

abtatialaaltialplexit.

cVAelhavetirprateallthearket

rikfatrftheerlierivativepl

theterpartreitrik.EvethecVAa

plaivaillaFXfrwariplexbeaethe

terparteffetivelhlaAeria-tleptitefalt.Iaitittheptirik

prle,thecVAtraertalierthe

rrelatibetweetheterpartefalt

prbabilitatheerliarketrik

fatr,i.e.,wr-warik.

mariifrlaarehiplertha

cVAaeiapitalel,aew

relatiareeitheraatirheavilietivizibaktlearrfllllateralize

erivativetraati.Ilearetraati,

theleariheeffetivelreplaethecVA

ekithewrkw.Traatiareaie

rvatetthelearihe,whihbee

theterparttbthiefthetrae.

cterpartrikivirtalleliiatebeae

theexpreifllllateralizealtiatel

bakebtheleariheaiteber.

Thereiareterikthatthelearihefail

bttheriktrlrpafrelativel

iplerielikellateralaaeet,

liqiit,areialarketrik.sieleare

traatiarefllarie,thecVAharei

replaebthellateralfit,whihi

tpiallbaeaverihtrate.

ntalltraearwillbeleare.

clearihewilllbeablethale

taarizetratathed-Fraka

EmIRrelatipeiallexeptrprate

e-erheetraatifraatr

leari,thatbakatietprvie

reitlieariktrafererviethrh

erivative.Itietiatethatatleataqarter

ferivativetraatiwillreaioTc,

whiheabakwilleetaitaibth

cVAaleariwrkw.

Traatiareaiervatetthelearihe,whihbeetheterpart

tbthiefthetrae.


9/12

Corporate Treasury





Risk Control

Bank Regulator


Derivatives Pricing

MarketRisk

ClearinghousesCreditRisk

Funding

Funding

Collateral Funding

Cost

Regulatory Capital& Reporting

cterpartrikivirtalleliiatebeaetheexpreifllllateralizealtiatelbakebtheleariheaiteber.

counterpArty rIsK WorKloW WIth cleArIng


10/12

Reliableatafeethatfailitate

relarpateaataiterithekareabltel

faetalteffetive

terpartrikaaeet.

Baktpiallaitaieparatetefr

theiraitraiek,rhlaliebtheajraetlaeiteretrateafreiexhae,reit,itieaeqitie.

sieterpartrikpaallaetlae,theterpartriktetextrat

traati,arketataarefereeatafrallthevaritraite.Iaiti,ppleetalrefereeatalealetitie

aaterareeetaeetefrtheratabae.Theetetpialleifferetatafrat,blieaai

veti,awellaprprietariterfae,

aiiiatplexit.

Theextetfhalleeivlvebalai

perfraeaalabilitwithaaltial

rbte.Theilatieieahavet

valethererfeillitraati

verahreftreateaeveraltha

arketeari.depeitheizef

theprtfliaberfrikfatr,e

hrtttheeliieabeeear.

Hwever,thereareritialaaltialapetthatatbeaeawaivetheirrleithe

rii,hawr-warik.Relatrare

tilraiithebariterfelieverrikfatr,haptetialhifti

baiprea,vlatilitiearrelati.new

relatrreqireetfrbak-tetia

tretetiareeieterethevaliit

ftheel.

otptftheilatieieilerret,

expeteaptetialftreexpre,

cVAaeiapitalbterpart.

Thetehlalaptreterpartexpreliitahihlihtbreahe.givethe

plexitftheiptatpt,arbt

reprtiteiritial.Thetehl

allwareatifexpreetriala

varietfiei,iliitra

lealjriiti.Thetehlalallwrilliwitreltbterpartetti

etaiivialtraati.Bextei,

erhlhaveaefieteatiaeexpeterelt.

Thereaalbeaeparatetefrarialpriifewtraeaativeaaeetf

cVA.Thearialpriitleetaereltftheprtfliilati,iethepriefeahewtraeiaftiftheareate

exprewiththatterpart.Beaefthi,allatiarialcVAiareaable

tiefraeabeaiiathallee.ThecVArikaaeetteprviecVA

DAtA AnD technology chAllenges

Thetphitiatelbalbakhavetarete

thecVAaleariwrkwapprtitehlifratrtre.Itiexpetethatreialbakwillfllwitvertheextfewear.


11/12

eitivitiefrheiprpe.Hee

bkebthecVAekhlwthrhtheilatieiethatthearereete

itheexpreaapitaletri.Whereathe

cVAekaheereitaarketrik,

lapprvereithee,ilicds,

ccdsateextetreitiie,abe

ilefrrelatrapitalallati.

clearetraatitbefetthe

leariheteatraerepitrie.

sieleariivlveail(rrefreqet)arii,thebakllateralaaeet

tehlbeiteratewiththe

learihe.Ithlalbeiterate

withtheterpartrikte.Ieall,

theilatieiewlplarret

llateralpitiarevalethefreaharketeariteterieetexpre.The

ilatieiehlalirpratethe

ariperifrik,i.e.,therikflefr

-eliverfllateral.

Evewiththerii-iewavef

iprveet,thepitrereaiverplex.

Thetphitiatelbalbakhave

taretethecVAaleariwrkwa

pprtitehlifratrtreeribeithipaper.Itiexpetethatreialbak

willfllwitvertheextfewearirert

ptiizeapitalaaaerikreeffetivel,

awellaplwithewrelati.

IR/FX Credit Commodities

Trading System(s)

Equities

CollateralManagement System

Clearing Systems& Trade Repos

ReportingMarginal CVA Pricing Tool

CVA RiskManagement System

Transaction Reference Data

Counterparties Legal Limits Market Data

Counterparty ExposureSimulation Engine

counterpArty rIsK DAtA loWs & technology InrAstructure


12/12

Qatiialeaiprvierfaalti,traiarikaaeetftwarefrthe

lbaloTcarket.oritefiteratepreapt-traeltiallwarket

partiipattbettervale,traearikaaetheirexprearepre

effetivelthaiarketiti.

Fei2002,Qatihaver120tp-tierlietiliveftheixlaretlbal

bak,twfthethreelaretaetaaer,leaiheef,iraepaie,

peifatheraialitittiar15trie.

Rewefrrlietf,epthfexperieeaitettivati,Qatii

itetlrt-t-arketwithititive,awar-wiilti.

Frfrtherifrati,pleaeviitwww.qatilti.

ABouTQuAnTIFI

conTAcTQuAnTIFI

[email protected]

EuRoPE

16martiLegra

L,Ec1A4En

+44(0)2073978788

noRTHAmERIcA

230ParkAvee

newyrk,ny10169

+1(212)784-6815

AsIAPAcIFIc

111Elizabethst.

se,nsW,2000

+61(02)92210133

quantifi whitepaper_how the credit crisis has changed counter party risk management

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