MANAGING COUNTERPARTY CREDIT RISK, BASEL III AND RECENT REGULATORY ISSUES 7 – 8

Transcription

MANAGING COUNTERPARTY CREDIT RISK, BASEL III AND RECENT REGULATORY ISSUES 7 – 8
MANAGING COUNTERPARTY CREDIT RISK,
BASEL III AND RECENT REGULATORY ISSUES
7th – 8th May 2015, KUALA LUMPUR
Key Highlights:
• Counterparty Credit Risk – Exposure at Default (‘EAD’) in Trading Books
• Basel ll Counterparty Credit Risk (CCR) Capital Framework – Credit Risk Capital Calculation Methods Analysed
and Compared
• Counterparty Credit Risk – Key Areas of Basel 2.5 and Basel lll Reforms
• Evolving Counterparty Credit Risk Implications of the Basel Committee ‘Fundamental Revision of the Trading
Book’ Proposals
Expert Course Director
Douglas Bongartz-Renaud
Former Global Head of Rate Derivatives and Structured Products, ABN AMRO
SIDC CPE - accredited: 10 CPE Points
Visit www.REDmoneytraining.com today or call +603 2162 7800 for more information
Introduction
Over the past twenty five years, counterparty credit risk exposure has grown in tandem with the complexity of financial products
into one of the most challenging areas of credit risk computation and management. With the onset of the global financial crisis,
counterparty risk exposure management has played an increasingly important role in transaction pricing and risk capital calculations.
The area of credit risk exposure measurement and management in bank trading book activities is particularly challenging and complex
due to the interaction between market risk and credit risk. Effective trading credit exposure measurement and management methods
are becoming increasingly important to banks in managing capital.
This course will analyse the cost benefit of different approaches of effectively managing capital under the rapidly developing
regulatory requirements. Recent developments such as OTC central clearing of derivatives (CCPs), initial margin requirements for
non-cleared transactions, and the new Basel Standardised Approach (NIMM) requirements for calculation of exposure-at-default
(‘EAD’) on counterparty trading book transactions will be explained with examples. The two day program will also cover Basel 2.5
Specific Risk Charges, Incremental Risk Charges, and the Comprehensive Risk Measure which are designed to adjust the credit risk/
market risk capital boundary between banking and trading books. Additionally, the course will examine the additional measures being
framed into the current Basel Fundamental Review of the Trading Book process, and in the 2013 Basel Non-Internal Model Method
Counterparty Credit Risk Capitalisation proposal.
Learning Objectives
• An overview of how the global financial crisis has
reshaped interbank financial market activities and the view
of regulators on required reforms
• Basel 2.5 Incremental Risk Charge modelling which adds
credit migration loss risk to default risk in the trading book
risk capital framework
• Basel lll ‘Enhancing Risk Coverage’ measures focus
extensively on counterparty credit risk in key areas such
as the new CVA Risk Capital Charge, wrong way risk,
asset value correlation, central clearing counterparties,
and modifications to the IMM requirements for calculating
EAD in trading books
• The Basel Committee on Bank Supervision (BCBS)
proposals for ‘Fundamental revision of the trading book’
relating to counterparty credit risk
• Examples and case studies demonstrating and comparing
calculation of counterparty credit risk as it is developing
under the above requirements
Who should attend?
• Credit and market risk managers /risk control & audit
professionals
• Treasury/financial markets trading, sales & middle office
professionals
• ALM professionals & ALCO members
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Relationship managers
Finance & strategic planning professionals
Consultants & service providers to the banking industry
Banking supervision professionals and banking industry
analysts
Course Agenda
Day one
Counterparty Credit Risk – Exposure at Default (‘EAD’) in
Trading Books
This module will provide the concepts and framework for
internal limits-based counterparty credit risk exposure and,
Basel risk capital calculations, along with credit risk-based
pricing of transactions on an individual and counterparty
‘netting set’ basis, covering:
• Credit risk exposure measures defined and explained,
including Current Exposure (CE), Expected Exposure (EE),
Expected Positive Exposure (EPE) and Potential Future
Exposure (PFE)
• Market risk and market risk factor sensitivity in trading book
credit risk: calculating EAD
• Calculating credit risk on a portfolio basis with netting (ISDA
M/A) and collateral (ISDA CSA) agreement complexity
• Calculating future exposure on individual transactions and on
counterparty transaction ‘portfolios’
• Short-cuts in EAD calculation (PFE tables) and calculating
Credit Conversion Factors (CCF) for more complex financial
products
• Application of internal exposure measures: PFE for internal
exposure limits, EE/EPE for risk capital requirement
calculations, and CVA for pricing credit risk in transactions
and netting sets
Case Study: Calculating and using PFE and EPE tables for
interest rate swaps and FX outright forward transactions
Basel ll & lll Counterparty Credit Risk (CCR) Capital Framework
with Post Financial Crisis Revisions – Credit Risk Capital
Calculation Methods Analysed and Compared
This module will provide the participant with a solid
understanding and cost/benefit analysis of the Basel compliant
calculation options for measuring and managing CCR and
credit risk capital in trading books. The module will cover:
• Basel EAD calculation methods in detail: Current Exposure
Method (CEM), Standardised Method (SM) and Internal
Model Method (IMM)
• The new Basel EAD Standardised Approach calculation
requirements – replacing the ‘Non IMM’ (CEM and SM)
approaches in 2017 (with calculation examples)
• Initial margin requirements for cleared and non-cleared
derivatives, rules concerning ‘margin period of risk’, and
calculation of initial margin based on margin period of risk
• Systems implications and requirements for measuring
and managing CCR under the different EAD calculation
approaches
• The Basel ll Banking Book/Trading Book ‘boundary’: the
shifting balance between credit risk and market risk focus
• Basel credit risk: Expected Loss vs. Unexpected Loss
and Credit Valuation Adjustment (‘CVA’) capital and risk
management requirements under both credit loss measures
• Counterparty credit risk mitigation methods: close-out netting
(ISDA), collateral (CSAs) and OTC central clearing (CCPs)
• Basel lll ‘Enhancing Risk Coverage’ (part-1): Asset Value
Correlation (AVC), collateral margining period of risk limits,
Visit www.REDmoneytraining.com today or call +603 2162 7800 for more information
and stressed market risk factor data for EAD/IMM exposure
calculations
• OTC central clearing requirements and market structure: US
Agency (FCM) and non-US (ISDA based) CCP structures
frameworks and mechanics. Economic benefit analysis of
central clearing
Case Study: The Impact of netting - CEM vs. IMM, how
effective is the CEM Net Gross Ratio (NGR) as a netting set
exposure estimation method? The proposed replacement of
the CEM (Basel 2013 Non-Internal Model Method Counterparty
Credit Risk Capitalisation)
Day two
Counterparty Credit Risk – Key Area of Basel 2.5 and Basel lll
Reforms
This module focuses on the regulatory measures being taken
in the aftermath of the global financial crisis to increase credit
risk capital in banks, particularly in the trading books. We
will explain and analyse the wide range of CCR requirements
included under Basel 2.5 and Basel 3 and their implications,
including:
• CCR developments and problems in the interbank funding
and financial markets liquidity (demise of LIBOR);
• Introduction to Credit Value Adjustment (CVA)
o Counterparty credit risk spread (PD * LGD) and Expected
Loss vs. Unexpected Loss
o Counterparty exposure at default (applying EE/EPE) across
regular and irregular cash flow instruments (comparison of
CVA calculation on FX forwards and interest rate swaps)
o Managing CVA: bank trading book vs. banking book
approaches
• Basel 2.5: adding credit risk migration-based loss risk to
default loss risk in trading book capital and narrowing the
credit risk capital differences between trading and banking
books
o General risk charge vs. specific risk charge in trading
books (and implementation of SRC in VaR)
o Incremental Risk Charge (‘IRC’) requirements (adding
credit migration, default, and liquidity risks to trading
books on 1-year horizon basis)
o Comprehensive Risk Charge (banking book capital
treatment for credit correlation products)
• Basel lll: ‘Enhancing Risk Coverage’ (part 2): wrong-way
risk measurement, CVA Risk Capital Charges, Risk-Neutral
vs. Historical PDs, credit risk capital allowances for both
single-name multi-name (index-based) credit risk hedging
instruments, treatment of OTC central clearing transactions
• The appropriate PD measure: market-based (‘risk-neutral
of CDS-based) vs. ‘Real World’ (actuarial based) and
explanation of the differences and appropriate applications of
each measure
• CVA Risk Capital Charges: credit risk vs. market risk factor
exposures treatment
• Wrong Way Risk measurement and management: modelling
and measurement challenges
Case Study: Impact of the Basel lll CVA Risk Capital Charge:
standardised vs. advanced compared
Case Study: Identifying and pricing wrong-way risk in FX-based
transactions
Evolving CCR Requirements – Implications of the Basel
Committee ‘Fundamental Revision of the Trading Book’
Proposals and Other G-20 and Basel Committee Initiatives (in
Progress)
This module will focus the current inconsistencies and double
counting in the current overall CCR approach in the Basel
framework since the additional requirements added under Basel
2.5 and lll. We analyse the statements and proposals made in
the recently issued Basel consultative paper on forthcoming
revisions to the treatment of trading books. We will focus on
measuring the potential future impact on trading activities of
banks and on global financial markets, covering issues such as:
• Analysis of the proposals in the Basel ‘Fundamental Revision
of the Trading Book’ proposals related to CCR
• Harmonising the Basel CCR modelling approach: the
challenges of integrating default, credit risk migration loss,
and market liquidity risk into a single CCR measurement
model
• CVA Risk Capital Charge: hedging market risk factor
exposure and the challenge of integrating CVA credit and
market risk factor volatility into a single modelling framework
• Developments in managing CVA/DVA/FVA (Funding Value
Adjustment): pricing, risk management, risk capital calculation
and management
• EBA (European Banking Authority) Regulatory Technical
Standards for Prudential Valuation (under EU Capital
Regulation Requirements) for treatment of IAS required fair
value adjustments and Additional Valuation Adjustments
(AVA) under defined simplified and core approaches
• Fair value accounting impacts on banks: the Basel lll Risk
Invariant Leverage Ratio ceiling and the Debit Valuation
Adjustment (‘DVA’) debate
• Overview of OTC central clearing: status of G-20
implementation, US CFTC FCM agency CCP model
compared to the EU EMIR (and Singapore SFA) model, and
analysis of initial margin requirements on mandated products
for cleared and required non-cleared OTC transactions
Case Study: Measuring the impact of the Basel reforms, including
CCR requirements on the trading books as well as capital, leverage
and liquidity ratio rules. Assessing the implications of Basel reforms
on bank strategic balance sheets, trading books and growth planning
and the implications for future bank trading book activities.
Expert Course Director
Douglas Bongartz-Renaud has 36 years’ experience in financial markets, risk management, training and consulting. He retired from
ABN AMRO Bank in 2011 and moved from Amsterdam to Asia, where he continues working with banks in the areas of Basel framework
implementation, ALM, market and counterparty credit risk management, financial products and treasury trading development and training.
Douglas designs and delivers detailed training workshops for clients, risk management conferences and trade associations such as ISDA,
PRMIA, GARP and the ACI. He has trained on Basel 3, Funds Transfer Pricing, Liquidity Risk Management, Strategic Balance Sheet
Management, Credit Value Adjustment and Counterparty Credit Risk, and Currency Options Trading and Structuring. In his last position,
Douglas was a principle in ABN AMRO’s Risk Advisory Services business and established the market risk and treasury advisory practice.
He and his team worked with over thirty client banks in Asia and MENA. Prior to this he was involved in risk management to structure and
accelerate the process of complex derivative products development, validation and introduction. He was extensively involved with ABN
AMRO’s preparation and implementation of the Basel capital framework, working on Basel 3 and on CVA pricing, management and capital
planning in 2011. Previously, Douglas held the positions of Global Head of Currency Derivatives and Global Head of Rate Derivatives and
Structured Products at ABN AMRO and was responsible for building the Bank’s front-office financial products development group. Douglas
has provided extensive ALM consulting, training and implementation work in countries such as Egypt, Saudi Arabia, Indonesia, Malaysia and
Brunei. He is frequently invited to speak at conferences offered by Islamic Financial Market (IIFM), the international Islamic financial services
industry’s standard setting organization.
Visit www.REDmoneytraining.com today or call +603 2162 7800 for more information
Managing Counterparty Credit Risk, Basel III and Recent Regulatory Issues
7th – 8th May 2015, KUALA LUMPUR
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