Deloitte shares global expertise in Counterparty Credit Risk Management
Johannesburg, 19 November 2013: There continues to be significant shifts in the financial landscape as a result of increased regulatory scrutiny and the tougher operational environment for both local and global financial institutions. Much of this increased regulatory scrutiny has emerged as a result of the growing importance of counterparty credit risk in light of accounting treatment and risk-based capital regimes such as Basel III and Solvency II. This increased regulatory scrutiny will have far-reaching implications for the way in which these organizations manage their counterparty credit risk and price trades to ensure that they are generating sufficient return on capital. The latter is made more significant given some of the uncertainty in the international financial markets that has given rise to increases in the cost and scarcity of funds available to such organisations.
Deloitte, a leading financial and regulatory adviser to South African organisations, recently hosted a Counterparty Credit Risk Management Seminar. Deloitte has long been involved in advising regulators and governments around the world on derivative financial instruments, and more specifically the counterparty credit risk inherent in derivatives, which had historically received a large portion of the blame in the aftermath of the 2007 global credit crisis.
The audit and professional services firm brought together global specialists from both its international network and the global industry, each one ranking among the world’s leading international experts in key aspects of counterparty credit risk management, to join local experts in engaging with delegates at the seminar.
The seminar aimed to provide parties with a perspective on the future of counterparty credit risk management in South Africa based on global and local developments. The highly interactive seminar was positioned to enable delegates to participate in open discussions so as to deepen their knowledge and understanding of emerging practices within the derivatives industry, including: Credit Valuation Adjustments (CVA), Debit Valuation Adjustments (DVA), Funding Valuation Adjustments (FVA), Overnight Index Swaps (OIS) discounting in the absence of an observable market, centralised clearing, CVA as introduced by Basel III, and the impact of CVA and DVA on hedge effectiveness. In addition, presenters offered valuable insight as to how to calculate potential future exposures (PFE), how to quantify wrong-way risk, and how to incorporate correlation, netting sets and collateral in the CVA modelling process.
Keynote speaker was Mr Justin Clarke, founder of Edu-Risk International, a specialist in the field of quantitative analysis and development in financial markets and risk management. Justin is an acknowledged expert on OIS discounting, CVA and FVA and has presented numerous courses to attendees from major global banks in venues in Europe, North America, Asia and South Africa.
From its Netherlands office Deloitte brought Mr Koen Dessens, a Director within the Financial Risk Management team. He has extensive experience in the development and validation of models used for pricing, hedging and risk managing (exotic) derivatives portfolios, credit risk, market risk and economic capital models.
Among the more contentious topics covered during this seminar was that of including one’s own credit risk (DVA) as part of the valuation adjustment, and the creation of an OIS market in South Africa. The impact of counterparty credit risk adjustments on hedge accounting was also discussed, as well as possible solutions. The intricacies of funding valuation adjustments were hotly debated. Another interesting item that was touched upon was the choices faced by organisations around the derivatives operations, for example, the role of a CVA desk as profit centre versus cost centre, the benefits of a central collateral management desk, etc. These topics and more will be covered in a thought leadership piece to be released by Deloitte in the near future.
What is clear is that the regulatory, accounting, front office and risk management perception of counterparty credit risk has changed dramatically in recent years, bringing to the forefront new technical challenges for financial institutions. Despite having more clarity as to the final form and substance of the emerging banking and securities markets regulations, and the fact that banks are further advanced in developing their CVA management capabilities, future trends remain very hard to predict.