FINCAD @ Quant Congress
CFP hosted Quant Risk Management Congress in London at the start of October. The event brought together both speakers and attendees from the Bank of England and Tier 1 banks including HSBC, Credit Suisse, Barclays and Lloyds to discuss the impact of regulations on quantitative risk management. This is certainly an area that is top of mind as many financial regulations are now reaching their implementation stage.
On Day 1 there was a focus on xVA topics, in particular funding valuation adjustment (FVA), which was interesting given Citibank’s recent inclusion of FVA into its reporting. Day 2 covered stress testing with the Bank of England, risk measurement, and trading topics. Some of the areas in particular that stood out included:
- Mandatory Initial and Variation Margins for Bilateral OTC Derivatives
With the start of application just around the corner (January 2015), this was a popular session. The main aim of this requirement is to reduce systemic risk in the industry; collateral is viewed as an effective method of achieving this. The directive is based around 8 key principles. These principles range from identifying the instruments it will affect to an outline of the time line for introducing various stages and includes the calculation of baseline amounts for margin requirements.
- SA-CCR: The New Standard Approach for Measuring Counterparty Credit Risk Exposure
SA-CCR will replace the Current Exposure Method (CEM) and the Standardised Method (SM). It will apply to all OTC derivatives, exchange-traded derivatives and long settlement transactions. The exposures covered under the SA-CCR cover two components: replacement cost and potential future exposure. These components go some way to satisfy the limitations around the CEM and SM methods, such as differentiation of margined and un-margined transactions. SA-CCR is a significant change from the current non-internal model method approaches and, as a result, the Basel Committee has indicated an implementation date of 1 January 2017.
- The Potential and Expected Exposure Measures for Cleared Derivatives
This is an area where there is a need for significant enhancement, for example incorporating multicurrency margining, dynamic initial margin, and scenarios for clearing member defaults.
Both days of the conference were packed full of interesting sessions and these were just a few of the topics that caught our attention. If you attended the Quant Risk Management Congress, we’d love to hear about the areas you found most interesting in our comments section below.