THE CLIENT:

A tier-1 Investment bank

THE USERS:

Head of risk, derivatives trader, counterparty credit risk manager

Introduction

Keeping up to date with counterparty credit risk regulation is an on-going challenge for banks. After an overhaul of the Internal Model Method (IMM) under Basel III, regulation has turned to improving the standardized approach with SA-CCR. Despite being the simpler of the regulatory capital approaches, regional variations in SA-CCR are causing headaches for international banks.

Under the Counterparty Credit Risk framework, firms require timely risk measures in order to manage counterparty credit risk exposure and create timely trading reports.

Pain Points

This tier 1 bank already used a third-party risk management solution, however they faced significant challenges both in its performance and level of transparency, which impacted its ability to gain IMM approval.

• The bank's previous third-party risk management software took over eight hours to calculate credit risk, impacting its ability to generate timely risk metrics.
• This slow performance hindered the bank's ability to achieve Internal Model Method (IMM) approval for a wider range of trading and business activities.
• The bank required a solution that provided the necessary transparency to support its IMM approval process and scalability to grow with its business.
• Amidst budgetary constraints the cost of the existing solution was an ongoing challenge

The Solution

Counterparty Credit Risk by S&P Global Market Intelligence provides support for regulatory capital calculations and an extensive range of pricing valuation adjustments on a single, modular platform. Our subject matter experts collaborated with bank resources for a detailed business analysis to align the bank's requirements with technical specifications, before rolling out the extended solution. This was then followed by additional phases of implementation, which focused on integrating highly complex trades into a very large portfolio and generating the relevant risk measures.

Already a client of S&P Global Market Intelligence's Counterparty Credit Risk solution for managing exposure through Potential Future Exposure (PFE), the bank decided to extend the implementation for IMM approval after running scalability tests to achieve the target requirement of supporting in excess of 400,000 trades across multiple asset classes (interest rate, foreign exchange, credit, equity and inflation), for over 29,000 counterparties over several regions within the required calculation window.

This enabled the bank to upgrade/migrate scenario generation to Monte Carlo simulation of foreign exchange, interest rates, equity prices, inflation and par credit spreads and extend S&P Global Market Intelligence pricing models to exotic instruments and firm-specific requirements. The solution calculates a broad range of risk measures, including regulatory capital, PFE and credit valuation adjustment (CVA). It also performs risk factor and portfolio backtesting as well as exposure stress testing required for the IMM approval process.

Key Benefits

The bank's end users were able to run ad-hoc what-if analyses and provide transparency into methodology and inputs of calculations for model validation and trader enquiries. The project also demonstrated efficient integration with other components of the bank's architecture and flexibility to support multiple hierarchies.

In addition, the bank was able to reduce calculation time from more than eight hours to less than three while providing full support through the IMM validation process and meet regulatory requirements around collateral management.

They also introduced flexibility by simulating risk factors from internal or external source alike and perform multiple aggregations on results without performing additional valuations. Operationally, the project successfully integrated with existing systems within the bank while supporting various requirements with a single solution.

Learn more about our Counterparty Credit Risk Solutions.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.