Toronto, London (PRWeb UK) March 1, 2010
The market volatility experienced during the crisis has forced financial institutions to reassess their traditional approach to counterparty credit risk. Many banks have moved beyond the control mindset of credit limits to dynamically pricing counterparty credit risk (CCR) directly into new trades using Credit Value Adjustment (CVA) to price the counterparty risk.
This is one of the findings from a white paper, released by Algorithmics, that examines how institutions are using CVA – how it is currently being measured, where CVA fits into existing systems and how CVA practices are expected to evolve.
Bob Boettcher, Senior Director, Product Strategy, Algorithmics, said: “Many institutions are pricing CVA into trades at deal time, and are investing heavily to enhance their counterparty risk system capabilities. When institutions have the ability to calculate real-time incremental CVAs rather than relying upon simple CVA add-ons, they gain the ability to price trades that lead to risk reduction more aggressively than risk increasing trades. We see much of the push for incremental CVA coming from the front office, with traders concerned that the inability to properly assess CVA is resulting in lost business due to the use of simple, overly-conservative charges.”
As part of its ongoing research, Algorithmics conducted in-depth interviews to gain insight into how firms are currently measuring CVA and how CVA practices are expected to evolve.
- Many institutions said that they had under-emphasized CCR since a significant amount of their derivatives exposure was with counterparties that were perceived to be “too big to fail”.
- Other institutions relied only on limits as a means of preventing the exposure to any single counterparty becoming excessive, but did not actively price or manage the underlying risk.
- Some financial institutions used CVA to price the counterparty risk in their derivatives books, but without recognition of their own potential default.
Bob Boettcher concluded: “Counterparty credit risk has rapidly become the problem of all financial institutions, big or small. We see institutions changing their approach to counterparty risk with improvements to the traditional methods for measurement and control and many are now starting to implement CVA programs. Proper management of pre-deal pricing and transaction structuring can provide firms with a competitive advantage and pioneering firms that accurately assess and integrate CVA within their risk culture are better able to pursue an overall risk strategy by providing transaction level incentives for the front office.”
To download a copy of Algorithmics’ latest white paper, ‘Credit Value Adjustment: and the Changing Environment for Pricing and Managing Counterparty Risk', visit: http://www.algorithmics.com/EN/media/pdfs/Algo-WP1209-CVASurvey.pdf
For more information about Algorithmics' counterparty credit risk solutions, please visit: http://www.algorithmics.com/EN/solutions/counterpartycreditrisk/
For further information please contact:
Heather Smith, Senior Communications Manager, Algorithmics (UK) Ltd
Direct line +44 (0) 20 7392 5820 Mobile +44 (0) 7515 974223
Notes to Editors:
Credit Value Adjustment (CVA) is traditionally defined as the difference between the risk-free and risky value of one or more trades, or the expected loss arising from a future counterparty default. It can be formulated as: CVA = Discounted expected exposure x Default probability x Loss given default
Algorithmics is the world's leading provider of risk solutions. Financial organizations from around the world use Algorithmics' software, analytics and advisory services to help them make risk-aware business decisions, maximize shareholder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management. Algorithmics is a member of the Fitch Group. http://www.algorithmics.com
Algorithmics’ Counterparty Credit Risk for Treasury and Capital Markets combines the accuracy of scenario-based measures of market and credit risk with industry leading computational performance to provide a single framework for measuring and managing counterparty credit risk across all asset classes. The solution covers the entire spectrum of needs from enterprise credit exposure calculations for Basel II to pre-deal exposure calculations for the front office.
Fitch Group is the parent company of Fitch Ratings, a global ratings agency committed to providing the world's markets with independent, timely and prospective credit opinions. With 49 offices worldwide, Fitch Ratings’ global expertise spans across capital markets in over 150 countries. Fitch Ratings is headquartered in New York and London.
The Fitch Group also includes Fitch Solutions, a distribution channel for Fitch Ratings products and a provider of data, analytics and related services; and Algorithmics, the world's leading provider of enterprise risk solutions.
The Fitch Group is a majority-owned subsidiary of Fimalac, S.A., headquartered in Paris, France.
For additional information, please visit http://www.fitchratings.com http://www.algorithmics.com and http://www.fimalac.com
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