valuation of ir derivatives in a new regulatory environment speakers: eduardo pereira risk and...
TRANSCRIPT
Valuation of IR Derivatives in a new Regulatory Environment
Speakers:
Eduardo Pereira Risk and Regulation Specialist: Bloomberg L.PBernardo Santos Andrade Senior Manager, Toyota Motor Finance (Netherlands) B.V
Dutch Association of Corporate Treasurers Event: Hotels Van Oranje, Noordwijk, The Netherlands.
11th November 2013.
Agenda
• OIS Discounting: A new valuation framework;• CSA Agreements;• CVA;• CSA Agreements – Bloomberg ‘MARS’ solution;• TMFNL: Collateral Operation Case Study.
OIS Discounting
• Prior to Credit Crisis credit & liquidity effects were largely ignored in IR derivatives pricing
• Subsequent to Credit Crisis – Stronger Focus on Counterparty Risk (Credit)
• Evaluating Exposure• Risk Management
– Stronger Focus on Funding (Liquidity)• Divergence between “risk free” rates and funding levels• Funding arbitrage opportunities
• New framework required as credit & liquidity effects can no longer be ignored in pricing
Overview of OIS Framework
26th Oct 2005: 10MM EUR 7yr Pay 3.10%, q/q
(600,000)
(400,000)
(200,000)
0
200,000
400,000
600,000
800,000
1,000,000
21-Oct-05 21-Oct-06 21-Oct-07 21-Oct-08 21-Oct-09 21-Oct-10Mar
ket V
alue
in E
UR
Swap Value
• IR swaps can have both negative or positive values
• If market value is positiveÞ Counterparty owes moneyAnd if counterparty defaultsÞ Loss for everything that can’t be recovered........
• Credit mitigation very important• Changes in Regulation
Þ Banks to be penalised for uncollateralised swaps
Counterparty Risk
• Mitigating credit exposure (interbank)– Netting Agreements– Credit Support Annex (CSA) agreement– Central Counterparty (CCP) clearing
• CSA: Collateral posted between counterparties• CCP (e.g. LCH.Clearnet): “Variation Margin” paid
(or received) each day by clearing member (in addition to “Initial margin”)
• Both CSAs & CCP define how interest accrues on funds (collateral or margin payments)
Swaps in the Interbank Market
Credit & Liquidity Premium in Euribor
LOIS EUR <GO>
Credit & Liquidity Premium in Euribor
Credit Crunch: Market First Fears
Credit & Liquidity Premium in Euribor
Bear Stearns ‘Bailout’
Credit & Liquidity Premium in Euribor
Lehman Bankruptcy
Credit & Liquidity Premium in Euribor
Ireland Crisis
• IR swaps can have both negative or positive values• If market value is positive
Þ Counterparty owes moneyAnd if counterparty defaultsÞ Loss for everything that can’t be recovered........
• Credit mitigation very important• Banks generally have agreements to post collateral to each
other– Credit Support Annex (CSA) agreement – Central Counterparty Clearing (CCC)
• Generally corporates do not wish to sign CSAs or agree to CCCsÞ Both parties exposed to counterparty risk
Counterparty Risk
Counterparty Valuation Adjustments
For a swap how do you currently determine what you are being charged for your credit risk?
• By using the Bloomberg CVA/DVA calculator • My relationship banks provide full disclosure
on these charges • Unaware of any such charges • We calculate using other methods • We do not get charged
Webinar Poll 2 - Question
16%
33%
24%
23%5%
Responses: 106
Bloomberg CalculatorFull disclosureUnawareOther MethodsNot charged
Webinar Poll 2 Results
Calculating Credit Spreads
CVA/DVA Calculator
Calculating Credit Spreads
Calculate Exposure from Counterparties Perspective
Calculating Credit Spreads
Market Information: Credit, Rates & Volatility
Calculating Credit Spreads
DVA: Cost to Bank of Corporate Defaulting
Calculating Credit Spreads
CVA Calculation: Cost to Corporate of Bank Defaulting
Calculating Credit Spreads
Bilateral Calculation
Exposure Graph
Bilateral Calculation
Charting Net Cash Flows
Net Cash Flows affect Exposures