One of the top areas both buy-side and sell-side financial institutions are improving this year is the management of counterparty risk and collateral. The financial crisis shed light on the inefficiencies in both procedures and processing systems as firms struggled to manage risk exposures to defaulting (or near defaulting) financial institutions including Lehman Brothers. As a result, many books, Webinars (one we hosted) are popping up to educate those in need of information to support new projects to improve counterparty risk mitigation practices and collateral management operations. Related topics including clearing of credit default swaps via a central counterparty and credit valuation adjustment processes (CVAs) are also of high interest among DerivSource members and financial institutions post credit crisis.
Given the high volume of requests I’ve received for information on these topics, I’ve compiled a short list of some of the industry commentary, educational articles and resources available to DerivSource members. We will aim to add to this list to ensure all DerivSource members have access to as much information on the topic as possible. You are also welcome to add your own resources (web links) in the comments section (must be registered user to do this but registration is free).
New Book on Counterparty Credit Risk:
Counterparty Credit Risk – Measurement, Pricing and Hedging
Edited By Eduardo Canabarro
Darren Measures of J.P. Morgan, and speaker in our own counterparty risk and collateral management webinar hosted in April, has penned a chapter in this book! His chapter covers ‘enterprise-wide collateral management.”
Below is a link to the summary of the book, which was published in March. Although I haven’t read this, the book seems to be a good starting point for any individuals who are looking to build a better foundational understanding of credit risk management and related areas whilst also learning about new strategies following the financial crisis and in light of Basel’s recently proposed changes in the regulatory capital requirements on counterparty risks.
DerivSource’s Popular Articles:
Credit Valuation Adjustments (CVAs):
Hedging Counterparty Credit Exposures: the Evolution of CVA
In this April Q&A, Nick Newport of InteDelta explains current trends in managing credit valuation adjustments and the potential use of CVA beyond its traditional risk mitigation purposes.
Counterparty Risk Management:
This is an older article but still worth a read for investment managers and hedge funds.
Buy Side Focus: How to Better Manage Your Counterparty Risk Exposures Now?
Given the current market conditions and events of the last nine months, managing counterparty risk is of increasing importance for fund management companies. But how can fund managers ramp up their risk management resources to implement the controls they need to manage counterparty risk in these tumultuous times? Michael Bryant of InteDelta explains the basics and how any firm can effective make changes now.
Clearing of CDS via a Central Counterparty:
Central Counterparty Clearing for Credit Default Swaps: The Buy Side Perspective
Financial authorities, keen to reduce levels of systemic risk arising from potential counterparty defaults, are pushing for the introduction of central clearing for credit default swaps. If this initiative is to succeed, the buy-side, as well as the sell-side, must become fully involved. As yet, argue Peter Meechan and Bill Hodgson of Sapient, the buy-side’s involvement is still very tentative.
Collateral Management:
The Importance of Collateral Management in Our Brave New World
A column published last month by Sean Sprackling who was also a panel speaker for our April Webinar on collateral management. In this article Sean Sprackling explains how financial institutions should be enhancing bilateral collateral management infrastructure to strengthen counterparty risk mitigation practices, comply with new market recommendations and meet regulators’ expectations.
Stay tuned for more educational material on topics pertaining to counterparty risk and collateral management post financial crisis from DerivSource.com and add additional resources, links to books or articles in comments to share with fellow DerivSource members.
