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

19.2 Key Axes of Development

19.2.1 Quantification

Counterparty risk is present in numerous transactions for banks, other financial institutions and many corporates. It covers many different instruments across all asset classes and contains both market risk (credit exposure) and credit risk (default probability and credit migration) components. It must be measured over a long time horizon (often many years), accounting for the many possible risk mitigants. Pricing counterparty risk must be done at the counterparty (netting set) level and not for individual transactions in isolation, and wrong-way risks and other subtle aspects must be given careful consideration. Counterparty risk at the portfolio level is complicated by the uncertainty of exposure as well as the problem of measuring default correlations. Good management of counterparty risk is certainly achievable but comes via careful control and quantification of many aspects simultaneously.

19.2.2 Infrastructure

There is huge interest around CVA as firms seek to build their systems' capability to actively price counterparty risk on a real-time basis and build CVA into all new transactions. Banks and other institutions are tending to form front-office-based CVA groups (often known as CVA desks in banks) that take overall responsibility for charging and management of counterparty risk. This is likely to continue to be a big effort, with any major user of derivatives needing to have state-of-the-art assessment of their counterparty ...