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Partners in Risk & Capital Management

Counterparty Credit Risk

Counterparty Credit Risk and XVA

Measuring and managing counterparty credit risk has become central to the sound risk management of banks’ trading books. The 2008 crisis led to a sharpened focus on XVA, which includes measurement of the valuation impact of credit, collateral, capital and funding. Due to the dynamic nature of derivatives contracts, measuring counterparty and XVA risk requires highly computationally intensive algorithms. Regulations such as IMM enforce strict adherence to calculation standards for bank that wish to reduce their capital costs by using sophisticated internal models.

Our Approach

We enable clients to accurately model and quantify trading book credit exposure to regulatory IMM standards, for portfolios with even the most exotic products. We build frameworks to report exposures and ensure they remain in line with the clients’ risk appetite frameworks. We are deeply involved with implementing, testing and validating the underlying valuation models and Monte Carlo simulation processes used to calculate counterparty credit risk and XVA metrics.

Our Experience

  • Development of a reduced-dimensionality Heston model for counterparty credit risk at a large European investment bank
  • Development and implementation of an IMM framework at a Tier 1 US Investment bank
  • Extensive track-record of validating counterparty credit exposure models at a global US bank
  • Development of automated processes for reporting and explaining exposure changes
  • Development and testing of regression models for efficient credit risk and XVA calculation of exotic derivatives