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Counterparty Risk and the Role of CCP

Understanding the benefits and risks of CCP

Counterparty Risk and the Role of the CCP Course

A two-day course

  • Participants will learn how credit risk occurs in the major OTC products and how this risk can be measured and mitigated
  • This course will show how counterparty risk is quantified using techniques similar to VaR and Monte Carlo, but how we need to go further to quantify the real risk
  • You will learn about risk reduction through collateral and how this is possible under a Credit Support Annex (CSA)
  • We consider Exchange Traded Derivatives and their credit risk mitigation. We look at how “give up’s” are used to overcome practical difficulties
  • We will also look at the life cycle of an IRS and see how credit risk is managed

  • Learn about the regulatory environment created by Dodd Franks and EMIR which has sought to reduce counterparty risk between institutions and avoid any future risk of procyclicality.
  • Understand how credit risk is measured for derivatives. We look at Expected Exposure (EE), Potential Future Exposure (PFE) and Expected Positive Exposure (EPE).
  • Gain an understanding of how credit risk occurs in all the major derivative products.
  • Appreciate the credit risk reduction techniques used in the market today
  • Gain knowledge of the function of a Central Counterparty (CCP) and how they operate
  • Learn about the major global CCPs, examine what can go wrong, and what does happen if a CCP goes bankrupt!

An Introduction to the Regulatory Environment

  • Dodd Frank
  • EMIR
  • The introduction of CCPs for OTC Derivatives
  • Governance and Regulatory Oversight
  • CPSS-IOSCO Standards 

Overview of the OTC Products

There will be simple exercises to check for understanding and answer any questions regarding OTC products:

  • Interest Rate Swaps
  • Foreign Exchange Forwards
  • Credit Default Swaps
  • Options 

Counterparty Credit Risk in OTC Derivatives

  • How Credit Risk in Derivatives are measured
  • Basic CVA and DVA calculations
  • Measuring CCR (Counterparty Credit Risk)
  • Examples of how CCR occurs and the risks involved
    • IRS example. Following the life of the trade, we see how the CCR changes
    • Measuring CCR of an FX forward
    • CCR risk in options 

Quantifying Exposure

  • VaR
  • Expected Exposure (EE)
  • Monte Carlo Simulations
  • Potential Future Exposure (PFE)
  • Expected Positive Exposure (EPE) 

Netting Agreements

  • ISDA Master Agreement and the CSA (Credit Support Annex)

Case study: Example of how a CSA works in practice. We follow an IRS transaction and see collateral calls, including threshold, MTA, margining etc. 

Exchange-Traded Derivatives, Clearing and Settlement

  • Margining / Variation and Initial
  • Mark to Market (MTM)
  • Executing and Clearing Brokers
  • Central Counterparty
  • “Give – Ups”
  • Commissions

Case Study: We look at a futures trade placed in the market by a client, and follow the role of the executing and clearing broker, margining requirements, give-ups and cash flows. 

OTC Derivative Clearing and Settlement

  • Confirmation and affirmation

Case Study: We examine the payments during the life of an IRS within a CCP. The valuation and margins required. And how one swaps works within a portfolio.

  • Payments and Controls (SWIFT)
  • Nostro reconciliation and breaks
  • Novation
    • How does it work - a solution to counterparty risk?
    • Tear Ups

The trainer worked in Investment Banks including HSBC and Bank of Montreal for nearly 20 years. During this time, he worked in Operations and then as a trader, running books in FX, bonds and derivatives.

The trainer has run courses all over the world including Amsterdam, Dublin, London, New York, Hong Kong, Singapore, Jakarta, Johannesburg, Delhi, Accra, Johannesburg etc.

The trainer delivers courses which focus on providing a practical and in-depth understanding of the markets from a Trading, Operations and Risk viewpoint. His courses are interactive and stimulating, offering delegates the opportunity to participate in an environment which encourages free discussion of the real issues faced in the workplace.

In addition to his training activities, he has undertaken various consultancy projects, such as an in-depth collateral risk assessment at a major European Investment bank.

The trainer held the position of Non-Executive Director of Cazenove’s Derivative Oversight Committee for many years. Acting as a member of the committee in a general consultative capacity to assess the firm’s derivative capabilities and risks.

The trainer has also presented at JPMorgan Forums in London, speaking on topics such as the Benefits and Risks of Derivatives. He along with representatives from the FSA, law firms, hedge funds etc. were asked to give their views on the risks of derivatives to 150 / 200 Directors and senior managers from the top investment firms in the UK.

The programme is designed to give participants an in-depth understanding of how Credit Risk occurs in derivative products and how this risk is managed through Central Counterparties. We examine how effective these CCPs are and what might happen if they themselves went bankrupt.

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