Background

Counterparty risk is a topic which has been elevated to the forefront of the front office, risk management and regulatory agendas following mark-to-market volatility and defaults over the global financial crisis.

Universal acknowledgement of credit valuation adjustment (CVA) and debt valuation adjustment as essential components within the fair-value of derivatives and securities financing transactions has reinforced the importance of counterparty risk management across a much broader spectrum of financial services firms.

This survey is a collaborative effort by Deloitte UK and Solum Financial Partners, in conjunction with Deloitte Germany, Deloitte Italy and Deloitte Norway. It includes contributions from 21 participating banks and aims to take stock of the industry’s response to the numerous theoretical issues and operational challenges raised as a result of the evolving regulatory, accounting and risk management environment.

Key findings include

• Perceived capital savings that could come from leveraging the advanced CVA approach is incentivising a new set of respondents to pursue advanced ‘internal model method’ approval from their respective supervisory bodies.
• A large majority of respondents are experiencing difficulties in being able to fully model collateral over the entire duration of a trade, although this is fast-becoming an urgent priority for capital efficiency purposes and to price instruments correctly.
• Consensus is emerging amongst practitioners for the need to move away from LIBOR discounting for secured funding trades towards overnight index swap discounting.
• Virtually all participants acknowledge the necessity of a funding valuation adjustment, even if the accounting standard setters appear to be less convinced.

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