Over the past several weeks, we touched down in Boston, Chicago, and New York with PRMIA to present on the modeling challenges associated with hybrids and advanced structures.
Dr. Tony Webb, Director of Analytics at FINCAD, presented with a variety of panelists to representatives from a wide variety of organizations across the industry including State Street, Bank of America, the Fed, Moody's, KPMG, and Morgan Stanley.
Tony's presentation touched upon the challenges around hybrid modeling and the advantages of having a modeling framework that can be easily configured with the desired dynamics of the various underlyings, that automatically takes care of the no-arbitrage conditions, and that supports automatic processing (STP) from deal capture to valuation and risk for any instrument. Examples of applying such a framework included ASCOTS and CVA/DVA/FVA. Tony also discussed the benefits of Universal Algorithmic Differentiation, and its applicability to calculating risk for both vanilla and hybrid instruments.
The panel discussions centered on a few key themes that came out of the presentation and audience questions/comments:
- Trade Capture and Management: the challenges of capturing deal information, including non-standard terms, break clauses, and integrating data from various systems.
- Market Data Acquisition: Sourcing good quality market and reference data to perform valuation and risk management.
- Counterparty Credit Risk: the challenges of calculating CVA, and the question of whether the regulators' prescriptive recipes for mitigating CCR are appropriate.
- Model Risk: discussion around the resources going into model validation versus developing new improved models.