Algorithmics advocates active management of counterparty credit risk with CVA in new white paper

In its latest white paper on counterparty credit risk, Algorithmics outlines several recommendations and milestones for any institution interested in actively managing its counterparty credit risk (CCR) using credit valuation adjustment (CVA) to price the counterparty risk.

Toronto, London (PRWeb UK) September 26, 2010 -- In its latest white paper on counterparty credit risk, Algorithmics outlines several recommendations and milestones for any institution interested in actively managing its counterparty credit risk (CCR) using credit valuation adjustment (CVA) to price the counterparty risk.

Since the crisis, there has been a shift from passive to active management of counterparty credit risk that requires increasingly accurate and more frequent CVA calculations – from daily, to intraday to real-time. Many institutions have begun to centralize the quantification, pricing and management of their counterparty credit risk by establishing an internal CVA trading desk that quantifies CCR for individual business lines and uses the price measure of CVA to actively manage this risk across the entire institution.

Bob Boettcher, Senior Director, Product Strategy, Algorithmics, said: “Many financial institutions are now looking to actively build up their CVA capabilities to accurately price and manage counterparty credit risk across all their business lines. We see CVA desks in the front office becoming standard practice for banks and other large OTC derivatives users.

“However, rigorous calculation of CVA is non-trivial, even on a periodic basis. Algorithmics believes that the key to running a successful CVA desk is to find the right balance between risk taking and active hedging. Once institutions have this balance and an effective mechanism to compute incremental CVA at deal time, they can use accurately priced CVA to competitive advantage in their trading businesses.”

Algorithmics’ latest white paper, “Towards active management of counterparty credit risk with CVA”, explores best practices and practical challenges in counterparty credit risk management through proper calculation of CVA, and builds on the white paper published in March 2010 on emerging CVA practices, “Credit Value Adjustment: The changing environment for pricing and managing counterparty risk”.

Key recommendations for actively managing counterparty credit risk with CVA:

o   Accounts for all trades with a single counterparty, and properly models bi-lateral netting and collateral agreements including the margin period of risk
o   Generates risk-neutral scenarios across all risk factors
o   Incorporates wrong and right way correlations in the CVA measure

o   Centralize the quantification, pricing and management of counterparty credit risk that covers all asset classes and business lines
o   Provide more competitive pricing, increase transaction volumes with beneficial counterparties
o   Hedge CVA to avoid dramatic swings in profit and loss, and build an understanding of the residual risks of this hedging

Ben De Prisco, Senior Vice President of Research and Financial Engineering at Algorithmics concluded: “CVA modeling approaches that take short cuts or make inappropriate assumptions can have a dramatic impact on results and undermine the potential benefits for firms. Our consistent and systematic approach to CVA leverages the proven structure of our integrated market and credit risk solution, and will provide financial institutions with the foundation they need to enhance their pricing practices and improve their capital management.”

To download a copy of Algorithmics’ latest white paper, “Towards active management of counterparty credit risk with CVA”, visit: http://www.algorithmics.com/CVA

For more information about Algorithmics' counterparty credit risk solutions, please visit: http://www.algorithmics.com/integratedrisk

For further information please contact:

Heather Smith, Senior Communications Manager, Algorithmics (UK) Ltd
Direct line +44 (0) 20 7392 5820 Mobile +44 (0) 7515 974223
E-mail Heather(dot)smith(at)algorithmics(dot)com

Notes to Editors:

Credit Value Adjustment (CVA) is traditionally defined as the difference between the risk-free portfolio value and true portfolio value of one or more trades. This accounts for the expected loss arising from a future counterparty default and can be formulated as: CVA = Discounted expected exposure x Default probability x Loss given default

CVA desks are trading desks. They can be viewed as providing a service within an organization by taking the problem of quantifying CCR away from the individual business lines for a fee.

Algorithmics is the world's leading provider of risk solutions. Financial organizations from around the world use Algorithmics' software, analytics and advisory services to help them make risk-aware business decisions, maximize shareholder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management. Algorithmics is a member of the Fitch Group. www.algorithmics.com

Algorithmics’ Integrated Market and Credit Risk solution combines the accuracy of scenario-based measures of market and credit risk with industry leading computational performance to provide a single framework for measuring and managing counterparty credit risk across all asset classes. The solution covers the entire spectrum of needs from enterprise credit exposure calculations for Basel II to pre-deal exposure calculations for the front office.

Fitch Group is the parent company of Fitch Ratings, a global ratings agency committed to providing the world's markets with independent, timely and prospective credit opinions. With 49 offices worldwide, Fitch Ratings’ global expertise spans across capital markets in over 150 countries. Fitch Ratings is headquartered in New York and London.

The Fitch Group also includes Fitch Solutions, a distribution channel for Fitch Ratings products and a provider of data, analytics and related services; and Algorithmics, the world's leading provider of enterprise risk solutions.

The Fitch Group is a majority-owned subsidiary of Fimalac, S.A., headquartered in Paris, France.
For additional information, please visit www.fitchratings.comwww.algorithmics.com and www.fimalac.com

© 2010 Algorithmics Software LLC. All rights reserved. ALGORITHMICS, Ai Logo, ALGORITHMICS & Ai Logo, ALGO, MARK TO FUTURE, RISKWATCH, KNOW YOUR RISK, ALGO RISK, ALGO MARKET, ALGO CREDIT, ALGO COLLATERAL, ALGO FIRST, ALGO ONE, ALGO FOUNDATION, ALGO ACTUARY, ALGO OPVAR and TH!NK Logo are trademarks of Algorithmics Trademarks LLC.
Algorithmics Trademarks LLC & Algorithmics Software LLC, c/o Algorithmics Incorporated, 185 Spadina Avenue, Toronto, Ontario, Canada M5T 2C6

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