The xVA challenge : counterparty credit risk, funding, collateral, and capital /: counterparty credit risk, funding, collateral, and capital. (2015)

• Record Type: Book
• Further Information: Note: Jon Gregory.
• Authors: Gregory, Jon, 1971-
• Contents: List of Spreadsheets xix List of Appendices xxi Acknowledgements xxiii About the Author xxv 1 Introduction 1 2 The Global Financial Crisis 3 2.1 Pre-crisis 3 2.2 The crisis 5 2.3 Regulatory reform 8 2.4 Backlash and criticisms 8 2.5 A new world 10 3 The OTC Derivatives Market 11 3.1 The derivatives market 11 3.1.1 Derivatives 11 3.1.2 Exchange traded and OTC derivatives 12 3.1.3 Market size 12 3.1.4 Market participants 14 3.1.5 Credit derivatives 16 3.1.6 The dangers of derivatives 17 3.1.7 The Lehman experience 17 3.2 Derivative risks 18 3.2.1 Market risk 18 3.2.2 Credit risk 19 3.2.3 Operational and legal risk 19 3.2.4 Liquidity risk 20 3.2.5 Integration of risk types 20 3.2.6 Counterparty risk 20 3.3 Risk management of derivatives 20 3.3.1 Value-at-risk 20 3.3.2 Models 23 3.3.3 Correlation and dependency 23 4 Counterparty Risk 25 4.1 Background 25 4.1.1 Counterparty risk versus lending risk 25 4.1.2 Settlement and pre-settlement risk 26 4.1.3 Mitigating counterparty risk 28 4.1.4 Exposure and product type 29 4.1.5 Setups 31 4.2 Components 32 4.2.1 Mark-to-market and replacement cost 33 4.2.2 Credit exposure 33 4.2.3 Default probability, credit migration and credit spreads 34 4.2.4 Recovery and loss given default 35 4.3 Control and quantification 36 4.3.1 Credit limits 36 4.3.2 Credit value adjustment 38 4.3.3 CVA and credit limits 38 4.3.4 What does CVA represent? 39 4.3.5 Hedging counterparty risk 41 4.3.6 The CVA desk 42 4.4 Beyond CVA 43 4.4.1 Overview 43 4.4.2 Economic costs of an OTC derivative 43 4.4.3 xVA terms 44 4.5 Summary 46 5 Netting, Close-out and Related Aspects 47 5.1 Introduction 47 5.1.1 Overview 47 5.1.2 The need for netting and close-out 47 5.1.3 Payment and close-out netting 48 5.2 Default, netting and close-out 49 5.2.1 The ISDA Master Agreement 49 5.2.2 Events of default 49 5.2.3 Payment netting 50 5.2.4 Close-out netting 51 5.2.5 Product coverage and set-off rights 52 5.2.6 Close-out amount 53 5.2.7 The impact of netting 55 5.3 Multilateral netting and trade compression 56 5.3.1 Overview 56 5.3.2 Multilateral netting 56 5.3.3 Bilateral compression services 57 5.3.4 The need for standardisation 58 5.3.5 Examples 58 5.4 Termination features and resets 61 5.4.1 Walkaway features 61 5.4.2 Termination events 62 5.4.3 Reset agreements 64 5.5 Summary 65 6 Collateral 67 6.1 Introduction 67 6.1.1 Rationale for collateral 67 6.1.2 Analogy with mortgages 69 6.1.3 Variation margin and initial margin 69 6.2 Collateral terms 70 6.2.1 The credit support annex (CSA) 70 6.2.2 Types of CSA 71 6.2.3 Threshold 73 6.2.4 Initial margin 74 6.2.5 Minimum transfer amount and rounding 74 6.2.6 Haircuts 75 6.2.7 Linkage to credit quality 77 6.2.8 Credit support amount 78 6.2.9 Impact of collateral on exposure 79 6.3 Mechanics of collateral 80 6.3.1 Collateral call frequency 80 6.3.2 Valuation agents, disputes and reconciliations 81 6.3.3 Title transfer and security interest 82 6.3.4 Coupons, dividends and remuneration 83 6.4 Collateral and funding 84 6.4.1 Overview 84 6.4.2 Substitution 84 6.4.3 Rehypothecation 85 6.4.4 Segregation 87 6.4.5 Variation and initial margin rehypothecation and segregation 88 6.4.6 Standard CSA 89 6.5 Collateral usage 90 6.5.1 Extent of collateralisation 90 6.5.2 Coverage of collateralisation 91 6.5.3 Collateral type 92 6.6 The risks of collateral 93 6.6.1 Collateral impact outside OTC derivatives markets 93 6.6.2 Market risk and the margin period of risk 94 6.6.3 Operational risk 96 6.6.4 Legal risk 97 6.6.5 Liquidity risk 98 6.6.6 Funding liquidity risk 98 6.7 Regulatory collateral requirements 100 6.7.1 Background 100 6.7.2 Covered entities 101 6.7.3 General requirements 102 6.7.4 Haircuts 104 6.7.5 Segregation and rehypothecation 105 6.7.6 Initial margin calculations 105 6.7.7 Standardised initial margin method (SIMM) 106 6.8 Converting counterparty risk into funding liquidity risk 107 6.9 Summary 108 7 Credit Exposure and Funding 109 7.1 Credit exposure 109 7.1.1 Definition 109 7.1.2 Bilateral exposure 110 7.1.3 The close-out amount 111 7.1.4 Exposure as a short option position 111 7.1.5 Future exposure 112 7.1.6 Comparison to value-at-risk 113 7.2 Metrics for exposure 114 7.2.1 Expected future value 114 7.2.2 Potential future exposure 115 7.2.3 Expected exposure 116 7.2.4 EE and PFE for a normal distribution 116 7.2.5 Maximum PFE 117 7.2.6 Expected positive exposure 117 7.2.7 Negative exposure 118 7.2.8 Effective expected positive exposure (EEPE) 118 7.3 Factors driving exposure 119 7.3.1 Loans and bonds 119 7.3.2 Future uncertainty 120 7.3.3 Periodic cashflows 120 7.3.4 Combination of profiles 125 7.3.5 Optionality 126 7.3.6 Credit derivatives 128 7.4 The impact of netting and collateral on exposure 129 7.4.1 The impact of netting on future exposure 129 7.4.2 Netting and the impact of correlation 130 7.4.3 Netting and relative MTM 132 7.4.4 Impact of collateral on exposure 133 7.5 Funding, rehypothecation and segregation 135 7.5.1 Funding costs and benefits 135 7.5.2 Differences between funding and credit exposure 136 7.5.3 Impact of segregation and rehypothecation 136 7.5.4 Impact of collateral on credit and funding exposure 138 7.5.5 Examples 140 7.6 Summary 141 8 Capital Requirements and Regulation 143 8.1 Background to credit risk capital 144 8.1.1 Standardised approach 144 8.1.2 Internal ratings-based approach (IRB) 144 8.1.3 Double default 145 8.1.4 Exposure at default (EAD) 146 8.1.5 Incurred CVA 148 8.2 Current exposure method (CEM) 148 8.2.1 Add-ons 148 8.2.2 Netting and collateral treatment 149 8.3 The internal model method (IMM) 151 8.3.1 Background 151 8.3.2 The alpha factor and EEPE 151 8.4 Standardised approach for counterparty credit risk (SA-CCR) 153 8.4.1 Background 153 8.4.2 Basic approach 154 8.4.3 Netting 155 8.4.4 Collateral 156 8.4.5 Overcollateralisation and negative MTM 157 8.5 Comparison of EAD methods 157 8.5.1 Impact of maturity 157 8.5.2 Collateral 158 8.5.3 Negative MTM 159 8.5.4 Initial margin and threshold 159 8.5.5 Netting 160 8.6 Basel III 161 8.6.1 Overview 161 8.6.2 Stressed EPE 163 8.6.3 Increased margin period of risk 163 8.6.4 Backtesting 164 8.6.5 Wrong-way risk 166 <p&gt
• Edition: Third edition
• Publisher Details: Hoboken : John Wiley & Sons
• Publication Date: 2015
• Extent: 1 online resource
• Subjects: 332.6457; Credit derivatives; Financial risk management
• Languages: English
• ISBNs: 9781119109426; 9781119109433
• Related ISBNs: 9781119109419
• Notes: Note: Description based on CIP data; item not viewed.
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