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Counterparty Risk and the Role of CCP

Learn and understand the benefits and risks of CCP (Central Counterparty)

Counterparty Risk and the Role of the CCP Course

A two-day course

This counterparty credit risk training course is a 'must-know' for:
  • Asset Managers
  • Junior Traders
  • Sales Sales
  • Middle office
  • Risk
  • Compliance
  • Anyone wanting to understand Counterparty Risk and the role of the Central Counterparty in mitigating this risk.

  • 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 the credit risk management

  • 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 counterparty credit risk measurement is for derivatives. We look at Expected Exposure (EE), Potential Future Exposure (PFE) and Expected Positive Exposure (EPE).
  • Gain an understanding of how Counterparty credit risk Exposure 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!

Day 1

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 Risk Swaps
  • Options 

Counterparty Credit Risk in OTC Derivatives

  • How Credit Risk in Derivatives are measured
  • Basic CVA and DVA Counterparty Credit Risk 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 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 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

Day 2

The Function and Benefits of CCPs

The Central Counterparty clearing process

  • The Role of the Central Counterparty
  • “AIG” and “Lehmans 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
  • We look at how a CSD trade has been standardised for Clearing 

Exercise: Delegates are asked to 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:

  • Markit Serv
  • SwapClear
  • DTCC Deriv/SERV
    • TIW

Case study: clearing swaps


Delegates are asked what they  think  might happen if a major CCP went bankrupt?

What are the major safeguarding factors a CCP should put in place to ensure their  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 occur
    • Defaulting member’s initial margin and default fund contribution
    • Part of CCPs 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.

The counterparty credit risk course 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 counterparty credit risk course 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 counterparty credit risk course 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.

This counterparty credit risk training course has been designed to provide a thorough overview of Counterparty Credit Risk. We use credit risk case study examples to illustrate how Counterparty Risk occurs and the credit risk mitigating techniques used. Including, how the CCP operates and the residual, but with very real risks remaining in the Counterparty market risk today.


Have this course presented In-House

  • On a date, time and in a location of your choice
  • Topics expanded or deleted to your bespoke requirements

Have this course pre-recorded

  • Full course recording edited exclusively for your company
  • Files converted to enable housing on your LMS

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