Case Study – xVA II
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The client, an international full-service bank, asked for the analysis of the counterparty risk of its OTC-derivatives portfolio and the development of action recommendations for the future management of counterparty risks.
The Strategy / Our Approach
In the context of the project, the complete OTC-derivatives portfolio of the client was analysed with the help of our evaluation library-software LPACalc. For this purpose, the business operations were clustered according to their risk content: into CCP-cleared, bilaterally collateralised and unsecured operations. Afterwards, the consequences of various risk mitigation methods like netting, collateralisation, and clearing according to selected counterparties, were investigated. With the help of LPACalc the Credit Valuation Adjustment (CVA) and the regulatory equity requirements per netting-set were calculated, and the consequences of risk mitigation methods presented. The quantitative analysis was supplemented by interviews and workshops with the relevant departments.
LPACalc is a tool for the structuring and analysis of financial instruments that enables the automated evaluation and analysis of the complete portfolio using a number of different evaluation models. The risk management software supports the identification of economic and regulatory equity after Basel II and III, transaction- and portfolio-based. Furthermore, the calculation of CVA, DVA, the consideration of collateral agreements, and other xVA-components was integrated.
As a result, we developed a detailed roadmap for the future management of the counterparty risk. Thanks to the project, the client gained comprehensive insights into the current risks within his OTC-derivatives portfolio. What is more, opportunities for the optimisation of the portfolio and the counterparty risks became apparent. The roadmap for the future management of counterparty risks contained various risk mitigation methods of which the introduction of a client clearing solution was implemented together with us in a final project.