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Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition by Jon Gregory

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18.4 Technology

Given the ideal requirements to calculate incremental CVA in real time, regulatory requirements and hedging activities of a CVA desk, the technology requirements for counterparty risk are clearly significant. Below we outline the considerations and requirements for CVA technology.

18.4.1 PFE vs CVA

For around two decades, large derivatives dealers have invested significant resources in order to build sophisticated systems for quantifying potential future exposure (PFE). More recently, but for over a decade, some of these dealers have supplemented such systems with the ability to price (and hedge) counterparty risk via CVA. Regulatory rules in relation to backtesting and stress testing of EEPE and img and CVA VAR (Chapter 17) create further requirements. Despite this, many financial institutions do not have well-developed technology solutions for handling CVA and counterparty risk in general.

For historic reasons, PFE and CVA systems have often been developed in isolation. In some sense, this is not unreasonable since PFE systems drive credit limit and regulatory capital decisions, whilst CVA systems are concerned with valuation and hedging. Another important aspect to consider here is the need to simulate real-world exposures for PFE purposes and risk-neutral exposures for CVA quantification (Section 12.2.2). Added to this is the fact that CVA VAR under Basel III (Section ...

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