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Increased Regulatory Complexity in the Middle East
By Christian Kahl PhD | November 23, 2015

In mid-October, FINCAD and Abu Dhabi Commercial Bank (ADCB) held a seminar that explored the topic of valuations, hedging and risk management in the Middle East. The Dubai-based event was geared at (regional) buy- and sell-side institutions, as well as corporate treasurers.

As in Europe and the United States, regulations in the Middle East are holding financial institutions and corporate treasury departments to stricter capital and transparency requirements. This reality is making hedging transactions and risk management more complicated than ever before, and it is this trend that was the focus of our seminar.

The first half of the event consisted of a panel discussion moderated by myself on how Middle Eastern firms can improve their approach to risk management using different hedging strategies. Attendees heard the perspectives of local banking professionals, John Tuke, Head of Treasury and ALM at Commercial Bank of Dubai, Harsha Jayatunge, Executive VP and General Manager of Treasury Sales at ADCB, and Biswajit Dasgupta, CIO at Emirates Investment Bank. Part two of the seminar included a presentation given by Jaspreet Sahni, Head of Market Risk at ADCB Bank. Jaspreet talked through the challenges associated with pricing and risk analysis of various vanilla and exotic hedging instruments. To conclude the seminar, FINCAD’s Rachid Taimouri, Senior Enterprise Sales, gave a case study presentation demonstrating how two institutions enhanced financial modeling capabilities and improved risk management using FINCAD’s F3 Platform.

There were a few major themes that emerged from this event. One of these is the fact that financial institutions operating in the Middle East are dealing with the same level of complexity in terms of the regulatory and accounting environment as their counterparts in Europe and the US. For instance, funding value adjustment (FVA) and internal transfer of credit and debt value adjustment (CVA and DVA) are huge issues for sell-side institutions around the world. The key reason for this is that each institution has its own funding spread, which is determined by the quality of its credit and various other liquidity factors. Adding to the complexity is the fact that the accounting framework requires firms to take the market transfer price into account. Implementing efficient internal transfer mechanisms and incentives for credit and debt value adjustment require consideration of the respective hedging strategy, which is typically done at a credit portfolio level. Buy-side clients care significantly less about any of this, as they are more focused on securing the best prices. Therefore to remain competitive in terms of pricing, sell-side firms should be looking to risk and valuation technology that can help them get ahead of the funding benefit they provide to their clients.  

Another key takeaway from the event is the heavy role that regulatory change currently plays in driving financial institutions’ businesses. Prior to the crisis, firms made investment decisions solely based on economic factors. In today’s market environment regulatory capital changes play an ever increasing role in steering investment decisions, which is largely driven out of counterparty credit risk.

A third trend our speakers covered is this concept that financial organizations will typically have a finite IT budget in place. For many firms, the bulk of this money is being put towards adapting technology to cope with regulatory change. This status quo is unfortunate because often there is little if any budget left over for investing in technology that supports business innovation and growth. For this reason, firms should look to adopt risk and valuation systems that provide extreme flexibility for adapting to evolving requirements, preventing the need to invest time and money in reengineering systems each time standards are introduced or change. 

It is worth noting that FINCAD's proven industry standard risk and valuation solutions help financial institutions around the world comply with regulations that require fair value pricing, risk assessment and hedge effectiveness testing. Those that adopt a flexible approach to investment and risk management will not only prepare their firms for regulatory compliance, but will also position themselves to enhance business performance. To learn how, view our on-demand webinar, Creating Competitive Advantage with Risk Management.

About the author
Christian Kahl PhD
Christian Kahl PhD
Director, Head of Client Services | FINCAD

Christian is responsible for all client facing quantitative topics and resources globally. In his role, he deals with a wide spectrum of financial industry clients from asset management, hedge funds and insurance companies to accounting firms and sell-side institutions. Additionally, Christian has extensive expertise dealing with regulatory and accounting requirements across all market segments.    

Before joining FINCAD in spring 2015, Christian was the deputy-head of Financial Engineering in the Equity Market and Commodity department of Commerzbank, where he worked for five years supporting various trading desks. Christian Kahl has 10 years experience as a quant in sell-side institutions implementing models in cross asset front office pricing libraries. His quantitative research is largely focused on stochastic volatility modelling and high performance computing.