Breaking Barriers with Fair Value Insight Q & A
November 13, 2014

This Q & A page is associated with the Breaking Barriers with Fair Value Insight Webinar.

Q: Is collateral tracking managed under the Fair Value Insight system?

A: Fair Value Insight does not currently track collateral. The results of Fair Value Insight calculations (valuations and risk measures) can be used as input to collateral tracking. For example, Provident Risk Management uses Fair Value Insight to monitor current exposure against negotiated collateral thresholds. Reports can be tailored to look at current exposure and also produce projected exposure calculations based upon predetermined rate shifts and Fair Value Insight maximum peak exposure calculations. Contact us to discuss your needs and how we can meet them through future product development or a customized solution.

Q: Does Fair Value Insight comply with FAS 157?

A: Fair Value Insight contributes to your FAS 157 compliance program by providing a clear, consistent and transparent process for valuations that combine independent market data from ICAP and industry standard analytics from FINCAD. Together, these elements produce defendable, independent valuations, generally for Level II instruments. All Fair Value Insight valuation data can be exported to Microsoft Excel and manipulated to reflect credit adjusted valuation methods consistent with your approved FAS 157 policy.

Where FAS 157 dictates that fair values must represent exit values, FINCAD believes the independent market data provided by ICAP, the world's largest interdealer broker, constitute very representative source of market data for fair valuation. FINCAD's analytics are fully documented within Fair Value Insight to ensure Fair Value Insight provides a transparent means to generate fair values for use under FAS 157.

In the case of interest rate swaps, the counterparty credit exposure features output Maximum Peak Exposure (MPE), Expected Positive Exposure, Effective Expected Exposure, and Effective Expected Positive Exposure at a confidence level you choose. Any and all of these measures are at your disposal for determining counterparty credit risk exposures. However, Fair Value Insight does not yet generate Credit Value Adjustments, which may remain primarily subjectively determined. Provident Risk Management provides related services that may help you determine adjustments and Fair Value Insight provides the supporting calculations and defendable data from ICAP.

Q: How do you model credit risk of counterparties in the future? Rating transition matrix?

A: Provident Risk Management is in the process of developing a market-based monitor of counterparty credit quality. Provident counts on Fair Value Insight to be its data, valuation and risk measurement provider in this effort. More and more, Provident Risk Management sees counterparties moving away from ratings triggers in the swap and credit support documents and towards market-based credit triggers.

Provident Risk Management's Documentation Risk Matrix analyzes and scores each counterparty's ISDA documents to assess exposure to key risk elements. In addition, Provident Risk Management conducts a comparative review of key threshold amounts and collateral requirements. This information is combined with a current valuation report and a maximum peak exposure report produced using Fair Value Insight. The maximum peak exposure report is in essence a theoretical worst case credit exposure calculation. The combination of these three tools: Documentation Risk Matrix; Current Valuation Report; and Maximum Peak Exposure Report presents a clear picture of current and potential counterparty exposure.

Q: How can we do stress tests in Fair Value Insight?

A: The maximum peak exposure model in Fair Value Insight provides a worst case calculation of credit exposure in a defined period. By modeling worst case exposure, a picture of the depth of potential losses in the case of counterparty failure is produced. Provident Risk Management typically calculates potential credit exposure to a 95% confidence level.

FINCAD is evaluating the addition of curve bumping features to Fair Value Insight that will allow for the creation of "curve scenarios" as assumption or adjustment sets, which would be used to run valuations under those conditions.

Contact us to discuss your needs and how we can meet them through future product development or a customized solution.

Q: How can credit exposures be totalled by counterparty? Does the service include correlations between instruments / currencies / etc.?

A: Credit exposures are not currently totaled or netted by counterparty in Fair Value Insight. Correlations are not provided for yet, although FINCAD is seeking to collaborate on real cases to create this functionality.

Fair Value Insight allows Provident Risk Management to organize swap valuations by workgroup, portfolio and category. Provident Risk Management uses this organizational capability to produce portfolio reports and typically organize client counterparties into separate portfolios. Fair Value Insight then runs reports to demonstrate the needed data and measures. For example, a portfolio report can be set up to show each transaction with current clean valuations and the last maximum peak exposure valuation and maturity date.

There isn't currently a provision for handling correlations within portfolios, although FINCAD is seeking to collaborate on real cases to create this functionality. Please contact us to discuss you needs.

Q: Is the market data real time or end-of day?

A: Fair Value Insight has integrated end-of-day market data provided by ICAP, the world's largest interdealer broker – a very credible source of unbiased market data.

Q: Can I upload my own market data into Fair Value Insight to use in valuations?

A: This capability is under development currently and will be released within a few months. The market data currently integrated into Fair Value Insight is from ICAP who have teamed up with FINCAD to deliver Fair Value Insight as a joint offering. The analytics are from FINCAD's library of industry standard analytics.

If the data you require is not currently in Fair Value Insight, we may be able to source it on your behalf, removing the need for you to source and manage that data. One reason to stay with the Fair Value Insight market data is to pursue a cost effective and independent market data source.

Q: What is the cost of Fair Value Insight? Is it an annual cost license or a one-time cost?

A: Fair Value Insight is priced as an annual subscription. The cost of Fair Value Insight will depend on your service usage, so please contact a FINCAD representative to understand costs to meet your specific needs.

Fair Value Insight pricing does, however, match FINCAD's positioning as the value leader for financial analytics solutions. In addition, Fair Value Insight charter pricing is currently in effect, providing even greater value for early adopters of the service.

Q: How does Fair Value Insight measure credit risk?

A: Specifically, maximum peak exposure looks at counterparty credit risk – that is, the risk that your counterparty will not perform on its end of the agreement. The measure of maximum peak exposure is a dollar amount that you are exposed to in this context. Fair Value Insight provides both a profile showing the changing exposure across a selected time horizon and the peak exposure within a horizon, associated with a particular date.

Q: How does Provident Risk Management work with Fair Value Insight?

A: Provident works with Fair Value Insight in two ways. Firstly, we consult with Fair Value Insight clients to help them develop a clear risk management policy for derivatives. This might include development of policies and procedures for executing derivatives strategies, managing credit and market risk and managing counterparty risk. Building on this, we can help develop risk reports.

We are also very focused on ISDA documentation. For some banks we provide a full service ISDA origination and documentation negotiation platform. For corporate clients we use our Documentation Risk Matrix to produce an evaluation of existing ISDA documentation, and we also provide support to clients negotiating new ISDA agreements.

Some clients may not have sufficient activity to justify their own Fair Value Insight account. Those clients can outsource their Fair Value Insight needs to Provident Risk.

We will run their trade valuations, model credit exposure and produce reports tailored to their specific needs.

Q: What are some of the typical ISDA documentation problems you find, and is there anything we can do about documentation already in place?

A: Some of the problems we see relate to what we call "rights impairment". By that I mean provisions that are inserted into an ISDA schedule to limit the rights of the end user. These are typically one way provisions that do not apply to the dealer such as one-way ATEs (additional termination events), one way collateral provisions, or the inclusion of end user affiliates matched with the exclusion of dealer affiliates for the purposes of cross default. For example many end users were unable to act in 2008 as their swap counterparty was downgraded from investment grade, to junk and eventually filed for bankruptcy.

Another problem area affects set off and netting rights. One large regional bank incurred a loss of several hundred million dollars when an out of the money swap position could not be offset against the losses incurred by an affiliate. This type of problem is often a result of a silo culture in large organizations which prevents those organizations looking at exposure across the entire organization.

As for the question is there anything we can do about these problems, the answer is yes of course. First we need to measure the risk; we then need to apply a stress test counterparty exposure by looking at maximum peak exposure. Finally we need to provide for ongoing monitoring. Armed with a clear ongoing set of risk metrics we can take an informed approach to diversifying risk going forward.

Q: How do reports from Fair Value Insight get emailed to me?

A: With Fair Value Insight, you can either:

Request reports on demand right from the report menu, meaning you press a button and get a pdf or html report on the spot


Use the scheduler to receive regular reports in pdf format through your email account or a mailing group.

In the case where Provident is providing you with an outsourced service, they can schedule reports to arrive in your email box on your behalf.

Q: Is this presentation available for download?

A: Yes. Please visit this link.

Q: What are the key product differentiators of Fair Value Insight versus the FINCAD Analytics Suite 2009?

Difference Relevance
Fair Value Insight stores many positions The limit far exceeds FINCAD Analytics Suite for Excel
Fair Value Insight can value the positions on demand and a scheduled basis More automation, control and predictability
Fair Value Insight is subscription-based Matches cost to usage
Fair Value Insight is accessible over the internet No local installation
Fair Value Insight provides a controlled environment Easier to defend for internal corporate controls and defense against keying errors
Fair Value Insight can talk to machines Users can import position data and export valuation data
Fair Value Insight integrates market data Rolled into one subscription price

* Bloomberg is a trademark of Bloomberg Finance LP. FINCAD is not associated in any way with Bloomberg Finance LP.