Overview Analytics Problems Counterparty Credit Risk, XVA Pricing and Collateral Projection in Treasury Systems Andy McClelland Department of Quantitative R&D Numerix [email protected] October 30, 2014 Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 1/6 Overview Analytics Problems Analytics Engines Component of a Solution In-House XVA/CCR Analytics Analytics Engines Analytics engine traditionally used for valuation, hedging and risk of products with a range of models and methods. Consumed through interfaces like Excel, integrated into management tools, or resides on a server responding to requests from portals/dashboards or reporting systems. Complexity has migrated to counterparty credit risk, mutli-curve pricing, pricing adjustments, etc. Serves as a component of an overall solution - the analytics engine. Common integration points includes PRE-DEAL: Market data feeds/warehouses, trade repositories, and CSA databases. POST-DEAL: Reporting/accounting systems, Andy McClelland, Numerix, [email protected] etc. CCR, XVA and Collateral 2/6 Overview Analytics Problems Analytics Engines Component of a Solution In-House XVA/CCR Analytics Exposure Proles, XVA and Collateral Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 2/6 Overview Analytics Problems Analytics Engines Component of a Solution In-House XVA/CCR Analytics Exposure Proles, XVA and Collateral Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 2/6 Overview Analytics Problems Analytics Engines Component of a Solution In-House XVA/CCR Analytics Analytics Engines Analytics engine traditionally used for valuation, hedging and risk of products with a range of models and methods. Consumed through interfaces like Excel, integrated into management tools, or resides on a server responding to requests from portals/dashboards or reporting systems. Complexity has migrated to counterparty credit risk, mutli-curve pricing, pricing adjustments, etc. Serves as a component of an overall solution - the analytics engine. Common integration points includes PRE-DEAL: Market data feeds/warehouses, trade repositories, and CSA databases. POST-DEAL: Reporting/accounting systems, Andy McClelland, Numerix, [email protected] etc. CCR, XVA and Collateral 2/6 Overview Analytics Problems Analytics Engines Component of a Solution In-House XVA/CCR Analytics Analytics Engine as a Component of a Solution Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 2/6 Overview Analytics Problems Analytics Engines Component of a Solution In-House XVA/CCR Analytics Benets of In-House XVA/CCR Analytics Tools Better understanding of how charges are reected in quotes and increased transparency. Can compute incremental CVA on a pre-deal basis and determine which counterparty is cheapest to deal with. For analysis of potential collateral requirements, assessment of CSA restructuring. Calculation of pricing adjustments (CVA etc.) for accounting/back-oce purposes. Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 3/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Counterparty Credit Risk Potential Future Exposure (PFE) and Expected Positive Exposure (EPE) proles relevant to the bank counterparty and aect deal costs. Internal limits on credit lines set by bank determined by PFE proles, and PFE/EPE are key inputs to counterparty credit risk charges under SMA/IMM approaches under Basel II/III. 1 Useful also in MC V@R, and a simple graphical check on deal/portfolio behaviour. Some (non-cleared) bilateral trades use PFEs for determination of independent amounts. Proles recognisable on a pre-margin basis, but much less so post-margin. Asymmetric CSAs employed by treasury counterparties induce asymmetric exposure proles. Common but complicating CSA featurs include ratings triggers (tightening of exposure proles) or right-to-break clauses. 1 See for instance http://www.bis.org/publ/bcbs189.pdf, Andy McClelland, Numerix, [email protected] paragraphs 97-98. CCR, XVA and Collateral 4/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection One-Way CSA and CCR Proles Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 4/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection One-Way CSA and CCR Proles Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 4/6 Counterparty Credit Risk Overview XVA - Pricing Adjustments Analytics Problems Collateral Projection XVA - Pricing Adjustments Tools for understanding charges/margins built into spreads and eects of CSA tinkering, i.e. moving to higher-frequency margining. to the bank Based on replication arguments, cost of the derivative into - Modern Price = + Classical Price | {z } OIS Discounting/No CCR Adjustments = Function Paths, CSA | {z } Deal | {z } | Averages Exposures is decomposed Adjustments | {z } CVA/FBA/FCA/DVA Conditions, Default Probs, Funding Spreads {z Collateral/CCYs } | {z Credit Hedging } | {z Costs/Benets } FVA costs charged will reect bank's funding spread, not the treasury counterparty. 2 Banks face a CVA capital charge under Basel III (when not recognising hedges). Wrong-way risk requires capacity to simulate stochastic hazard rates, correlated with market factors (ratings triggers/right-to-break clauses mitigate but dicult). Clearly dierent CSAs or portfolios (diversication eects) with dierent counterparties will yield dierent adjustments 2 See for instance =⇒ cheapest-to-deal-with problem. http://www.bis.org/publ/bcbs189.pdf, Andy McClelland, Numerix, [email protected] paragraphs 99-104. CCR, XVA and Collateral 5/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Collateral Projection Necessary to simulate collateral behaviour for PFE/EPE generation & XVA pricing. Useful for treasuries in projecting collateral surpluses/shortfalls when tinkering with CSA details. Collateral surpluses are collateral shortfalls for the bank counterparty =⇒ FVA. Banks with multi-CCY CSAs will post in cheapest-to-deliver CCY depending on short-term CCY basis costs/benets. Important to consider collateral substitutions/callbacks and potential for CCY switching depending on short-term XCCY basis markets. Expected switching dates can be implied from bootstrapped XCCY basis curves used in CSA pricing. Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 6/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Collateral Projection and CSA Restructuring Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 6/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Collateral Projection and CSA Restructuring Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 6/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Collateral Projection and CSA Restructuring Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 6/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Collateral Projection and CSA Restructuring Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 6/6 Overview Analytics Problems Counterparty Credit Risk XVA - Pricing Adjustments Collateral Projection Collateral Projection Necessary to simulate collateral behaviour for PFE/EPE generation & XVA pricing. Useful for treasuries in projecting collateral surpluses/shortfalls when tinkering with CSA details. Collateral surpluses are collateral shortfalls for the bank counterparty =⇒ FVA. Banks with multi-CCY CSAs will post in cheapest-to-deliver CCY depending on short-term CCY basis costs/benets. Expected switching dates can be implied from bootstrapped XCCY basis curves used in CSA pricing. Andy McClelland, Numerix, [email protected] CCR, XVA and Collateral 6/6
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