Professional Documents
Culture Documents
Quantifi - OIS and CSA Discounting PDF
Quantifi - OIS and CSA Discounting PDF
Quantifi - OIS and CSA Discounting PDF
com
Learning Curve
Derivatives Week is now accepting submissions from industry professionals for the Learning Curve section. For details and guidelines on
writing a Learning Curve, please call Robert McGlinchey in London at (44-20) 7303-1789 or email RMcGlinchey@euromoneyplc.com.
VOL. XX, NO. 26 / July 4, 2011 To sign up for email alerts and online access, call 800-437-9997 or 212-224-3570. 7
Increased use of collateral agreements participants as well as regulators and accelerated the impact on
Another effect of the credit crisis has been a dramatic increase in the the broader OTC markets. The measurement and management of
use of collateral agreements as a method of managing counterparty counterparty risk is now something that impacts all market participants.
risk. The 2010 International Swaps and Derivatives Association Accurate valuation of OTC products now requires accurate valuation
Margin Survey reports that 70% of OTC derivatives net credit exposure of the credit component of each transaction. In addition, regulatory
worldwide is covered by collateral, compared with 29% in 2003. initiatives such as Basel III and Solvency II, along with accounting
rules such as ASC 820 (FAS 157) and IAS 39 have mandated more
The New Interest Rate Modelling Paradigm accurate counterparty risk valuation and risk management.
Clearly the credit crisis had a significant impact on the interest rates The larger banks have led the evolution of valuing and managing
market. A large part of this related to the increased importance counterparty credit risk. Over time they have converged to generally
of credit and liquidity risk along with structural changes such as consistent methods and processes. The concept of a CVA is now
an increased use of collateral agreements. These changes have widely accepted and consistently calculated across the markets.
driven a profound shift in the way all OTC products are valued and OTC transactions that carry counterparty exposure executed by
risk managed. The result has been an abandonment of the classic all the larger institutions now have a CVA component as part of
derivatives pricing framework based on single interest rate curves the valuation. An accurate CVA calculation takes into account all
and the introduction of a new approach that takes into account transactions in the portfolio with that counterparty as well as any
current interest rate dynamics and market segmentation using netting agreements, credit support annexes and collateral.
multiple curves.