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Alternative Market Briefing

New white paper examines key requirements for measuring counterparty risk

Monday, July 08, 2013

Bailey McCann, Opalesque New York:

The measurement and management of counterparty risk is a rapidly evolving area. A range of new regulatory requirements is changing the way in which institutions view risk. This affects not only risk quantification but the whole commercial model of an institution. A new whitepaper from risk management consultants, InteDelta and technology provider Quantifi, looks at how investors can effectively measure and evaluate counterparty risk.

According to the paper, with the emergence of central clearing and central counterparties following the 2008 crisis, banks will now be forced to increase due diligence on central counterparties as a result of the amount of exposure involved. Credit Valuation Adjustment (CVA) has also become an important risk metric. The paper notes that many banks have now established active CVA functions to hedge CVA exposure. CVA has also become important as a basis for ensuring that counterparty risk is adequately priced into deals and as a basis for inter-desk charging within an institution.

For institutions, these changes require significant technical and compliance expertise and may require firms to change some of their structures in order to respond. "Underlying all of the change that institutions need to implement in respect of counterparty risk is the need to have the right operating models, met......................

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