Market Insights


Closing in on the Closout Period [PDF]

The credit exposure created by OTC trading can be considerable, as many institutions found out during the credit crisis which started in 2007 and saw Lehman Brothers and a number of monoline insurers fail. Increasingly, it is not just the loss of default which is taken into account, but also the change in market value of the OTC trading book due to changes in the credit spreads, a concept known as the Credit Valuation Adjustment (CVA).

A number of techniques have been devised over time to reduce the inevitable credit exposure incurred. They include netting agreements, collateral agreements, termination options, central counterparty clearing and bought credit protection in the form of credit default swaps or insurance. In this paper Bart Piron , Principal Consultant, SunGard’s Adaptiv will be looking in some detail at the implications of collateral agreements.

Getting IMA Approval - How Important is the Choice of System? [PDF]

Opting for the internal model approach (IMA) to market risk modeling is becoming a necessity for banks. George Mutema explains how choosing the right system is vital to gaining regulatory approval for an IMA-based model.

The standardised method for calculating market risk is based on a pre-specified ‘building-block’ approach. Market risk is computed for each portfolio exposed to interest rate risk, exchange rate risk, equity risk and commodity risk. This method is highly conservative as it adds up the capital charge for each risk category and assumes that the ‘worst loss’ will hit all portfolios at the same time.

Building a CVA System Into a Bank [PDF]

SunGard Adaptiv’s Andrew Hudson examines the hidden complexities of building a CVA system into a bank and explains why it is important to develop a system that is flexible and scalable.

Credit Value Adjustment (CVA) has a simple enough definition. It is the market value of counterparty credit risk, a calculation of the difference between the risk-free valuation of a portfolio and a portfolio value incorporating the possibility of the counterparty’s default. CVA originated within banks as an accounting measure, and the introduction of accounting standard IAS39 in 2000 required banks to provide a CVA number every three months.


Credit Limits: Rubber Stamp, Stick or Carrot? [PDF]

As the role of credit limits evolves from restricting traders to supporting their risk-taking decisions, Jean-Marc Schwob, SunGard’s Product Manager for Adaptiv Credit Risk, looks at the technology needed to enable this change and asks whether credit limits will evolve to the point where they are no longer necessary.

Dodd-Frank Act: Assessing the Regulations - Market Insights [PDF]  

Patrick Amon describes the likely impact of the new rules for the US banking sector.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is commonly viewed as the most important piece of legislation in the US banking sector since the Great Depression of the 1930s. The act creates a number of institutional frameworks and reorganizes the federal regulatory system, but most of its impact will lie in the rules that stem from this federal reorganization.

Taking the Strain: Enterprise Collateral Management & Optimisation - Market Insights [PDF]

A huge liquidity strain and increased demand for collateral assets has made collateral management a critical component of bank’s trading activity. An enterprise-wide approach to collateral management can help banks optimise their collateral inventory, generate revenue as well as reduce costs.

Credit Valuation Adjustment: the Challenges of Implementation - Market Insights [PDF] 

There are many texts on the theory of Credit Valuation Adjustment (CVA) but CVA is about much more than theory. The motivation for setting up an infrastructure to manage CVA varies considerably across institutions. The implementation of a CVA function can be highly political as it cuts across product lines and blurs the boundaries between risk management and the front office. There are also considerable systems, methodological and trading challenges. In this paper we examine some of the different motivations that have lead institutions to set up a CVA function and the practical issues they have faced.

What Comes Next for Collateral Management- Market Insights [PDF]

The SunGard/Finadium 2010 Survey on Collateral Management has identified collateral optimization and efficient collateral management as being the next big challenge for the collateral management industry. Whether facing new Basel III recommendations or looking to make processes more effective, 122 participants in the collateral management industry have clearly indicated that capital charges and optimizing the use of assets are their primary concerns. They also expect the next important advances in collateral management to occur in these areas. Technology will be a primary driver for meeting new collateral optimization mandates and solving both siloed and cross divisional challenges. 

Fit for purpose? Reassessing the role of risk management - Market Insights [PDF]

As the industry reassesses the role of risk management, and keeps up with new regulatory demands, legacy systems are becoming a constraint to progress. Josie Palazzolo outlines what capabilities a modern-day risk application must possess and how advancements in technology can make these applications a reality.

AFTER THE CRISIS: Re-engineering Risk Management? - Market Insights [PDF]

Thoughts from market experts including senior fellows and members of the board of directors of International Association of Financial Engineers (IAFE).

A New Approach to Collateral Management - Market Insights [PDF]

Collateralisation has been a fixture in capital markets for many years and has served as a useful means for firms to both increase trading capacity whilst simultaneously mitigating counterparty credit risk. The question arises: do the techniques which worked well several years ago still work today?

Risk Management Infrastructural Design In 2010 And Beyond - Market Insights [PDF]

Today's risk management environment requires greater transparency and efficiency as well as reliable networks to manage business processes in order to meet stakeholder demands, control costs and find liquidity.

Credit Charging in the Trading Book - The End of Credit Risk Management as we know it? - Market Insights [PDF] 

It is becoming increasingly common for banks to charge their front office trading units for the expected losses and the capital cost of credit risk generated by their derivative trades. This charge is an internal estimate of the cost of counterparty credit risk incurred in the course of trading activities and serves as a method of encouraging the front office to manage credit exposure prudently and charge for it properly. At the same time, the credit risk so created is itself monitored, managed and hedged in the derivative markets by a desk established specifically for this function.

Wrong WayRisk II - Market insights [PDF]

Dan Travers and Jean-Marc Schwob, product managers for SunGard's enterprise risk solution Adaptiv demonstrate how credit exposure profiles could be adjusted to reflect elements of wrongway risk.In our first whitepaper we outlined a pragmatic approach to the detection of wrong-way risk situations, combining a numerical analysis of portfolio sensitivities with a judgement-based assessment of counterparties' business risk sensitivities. In this second paper we extend this argument to demonstrate how credit exposure profiles could be adjusted to reflect elements of wrong-way risk. Furthermore, we examine whether exposures should be adjusted in Basel II Pillar 1 capital calculations.
 

Wrong way risk is defined by the International Swaps and Derivatives Association (ISDA) as the risk that occurs when "exposure to a counterparty is adversely correlated with the credit quality of that counterparty". In short it is where default risk and exposure come together. The terms 'wrong way risk' and 'wrong way exposure' are often used interchangeably.

Ordinarily in trading book credit risk measurement, the creditworthiness of the counterparty and the exposure of a transaction are measured and modelled independently. However in a transaction where wrong way risk may occur, this approach is simply not sufficient and ignores a significant source of potential loss.

In defence of sound risk management - Market Insights [PDF] 

Josie Palazzolo of SunGard looks at the role of risk managers in the current financial crisis and explains why so many were deprived of the analysis tools and the authority to carry out their responsibilities.


The Risk Overhaul: A new framework for risk management - Market Insights [PDF] 

As the market awaits new global regulations and debates the mathematical basis for a new modeling regime, Marcus Cree argues that now is the right time to re-consider the purpose of, and the constituencies served by, risk management. Rather than starting with a new solution, maybe the real starting point is 'What is the question?'

Risk Manager Roundtable: The Limits of Analytics - Market Insights [PDF]

The credit crunch is deepening and broadening into a more general – and worrying – financial malaise. Every day there are fresh casualties, including some of the most illustrious names in banking.

Catastrophic Risk: Part I - Market Insights [PDF]

Anticipating and mitigating catastrophic risk: We have recently experienced an unprecedented time in the global financial markets. Not surprisingly, risk managers and the techniques they employ are under fire from market participants, regulators, financial reporters, and shareholders alike.

Default Risk: Part II - Market Insights [PDF]

Over the last week, seismic events have fundamentally altered the capital markets landscape. Weary eyed risk professionals have spent 15 hour days answering a multitude of management concerns:

Strategic Risk: Part III - Market Insights [PDF]

Strategic risk taking: Financial institutions looking to revise their risk management processes must consider a more integrated approach that gives traders and risk managers organizational parity.