Counterparty Risk and the Role of CCP

Become an expert in the benefits and risks of CCP (Central Counterparty)

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A two-day counterparty credit risk course

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Download: Course Category Brochure | Course Outline

Day One

An Introduction to Counterparty Credit Risk Regulations & 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

Counterparty credit risk training includes simple exercises to check for understanding and answer any questions regarding OTC products:

Interest Rate Swaps
Foreign Exchange Forwards
Credit Risk Swaps
Options

Counterparty Credit Risk in OTC Derivatives

How is Credit Risk in Derivatives measured?
Basic calculations in CVA and DVA Counterparty Credit Risk
Measuring CCR (Counterparty Credit Risk)
Examples of how CCR occurs and the risks involved:
- IRS example 9following the life of the trade, we see how the CCR changes)
- Measuring the 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

This counterparty credit risk course explores the 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

Counterparty Credit Risk Training 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 of counterparty pre-settlement risk

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

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

Day Two

The Function and Benefits of CCPs

The Central Counterparty Clearing Process

The Role of the Central Counterparty
“AIG” and “Lehman Failure” Risk
Major CCPs / CME Clearing, Euronext/Liffe BClear, ICE Clear etc
“Close Out” Netting
Collateralisation of Residual Net Exposures
The Mechanics of OTC Derivative Clearing
Multilateral Compression and Tear Ups
Novation
How a CSD trade has been standardised for Clearing

Counterparty Credit Risk Course Exercise: Calculate the values of a CDS trade from a Bloomberg screen, to ensure their understanding of the standardisation “Big Bang”

Case study: How the CCP works. We look at a flow diagram, putting all the individual parts together.

The Major OTC Derivative platforms

MarkitSERV
SwapClear
DTCC Deriv/SERV:
- TIW

Case study: clearing swaps

Exercise: You are asked what might happen if a major CCP went bankrupt.

What are the major safeguarding factors a CCP should implement to ensure this doesn’t happen?

What is the Risk of a CCP?

What happens if a counterparty goes bankrupt?
CCP Disasters:
- Kuala Lumpur Commodity Clearing House 1983
- Hong Kong Futures Guarantee Corp 1987
CCPs and Systemic Risk
Domino Effect…Systemic Effect of a CCP failing
Deleveraging and Runs
Broker-Dealer Default and Auction Process
Managing Defaults
Default Waterfall ….. the protection when default occurs:
- Defaulting member’s initial margin and default fund contribution
- Part of CCP Equity
- Surviving members’ default fund contributions
- Rights of Counterparty Credit Risk Assessment
- CCPs Remaining Equity
Procyclical Effects
Impact of CCP Default on Banks

CCP Recovery and Resolution Planning

CPSS – IOSCO / Recovery and Resolution Planning 2012
Latest Papers
Resolution Tools:
- EMIR Requirements
- Initial Margin Haircuts
- Stress Testing
- Default Loss Scenarios
- Non-Default Loss Scenarios
- Fraud – Loss of Collateral

Case Study: What sort of event could really test CCPs and their inter-reliance to destruction?

We consider several possible scenarios and evaluate what can be done.

Redcliffe’s counterparty credit risk courses are delivered by a specialist who has worked in Investment Banks for nearly 20 years, including HSBC and Bank of Montreal. During this time, he worked in Operations and as a trader, running books in FX, bonds and derivatives.

He has delivered courses all over the world: this includes Amsterdam, Dublin, London, New York, Hong Kong, Singapore, Jakarta, Johannesburg, Delhi, Accra, and Johannesburg, to name a few.

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

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

He has presented at JPMorgan Forums in London, speaking on the Benefits and Risks of Derivatives and other topics. He, along with representatives from the FSA, law firms, and hedge funds, was 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.

He delivers courses with an in-depth and practical understanding of the markets from a Trading, Operations and Risk viewpoint. Expect this counterparty credit risk training course to be interactive and stimulating, offering you the opportunity to participate in an environment that encourages free discussion of counterparty credit risk and critical issues faced in the workplace.

This counterparty risk training will teach you the regulatory environment and policy created by Dodd Franks and EMIR, which has sought to reduce counterparty risk between institutions and avoid any future risk of procyclicality.
How counterparty credit risk measurement is for derivatives. We look at Expected Exposure (EE), Potential Future Exposure (PFE) and Expected Positive Exposure (EPE).
How counterparty credit risk exposure occurs in all the major derivative products.
Credit risk reduction techniques used in the market today.
Gain knowledge of the function of a Central Counterparty (CCP) and how it operates.
Master the major global CCPs, examine what can go wrong, and what happens if a CCP goes bankrupt!

You will master how credit risk occurs in the major OTC products from top to bottom and how this risk can be measured and mitigated.
This counterparty credit risk training 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-ups” are used to overcome practical difficulties.
You will cover the life cycle of an IRS and see the credit risk management.

This counterparty credit risk training course is a 'must-know' for:

Asset Managers
Junior Traders
Sales Staff
Middle office
Risk
Compliance
Professionals or analysts who want to understand Counterparty Risk and the role of the Central Counterparty in mitigating this risk

Redcliffe Training’s counterparty credit risk training will provide you with a thorough overview of Counterparty Credit Risk that can be used immediately in your day-to-day operations. We use credit risk case study examples to illustrate how Counterparty Risk occurs and credit risk mitigation techniques.

This includes how the CCP operates and the residual, but with very real risks remaining in the Counterparty market risk today.

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