A counterparty credit risk survey conducted by Quantifi shows financial firms have already or plan to implement major changes in their counterparty risk systems.

Quantifi recently participated in ICBI's Global Derivatives and Risk Management conference in Paris where it surveyed a cross section of financial firms. The survey revealed that financial firms who participated in the survey that 41% of respondents plan to complete major changes in 2012 or beyond.

Most firms said that the largest challenge within existing counterparty risk systems is data management and integration. The next largest challenge is the calculation of  Counterparty Valuation Adjustment (CVA) sensitivities.

“Regulatory and market changes are driving banks to overhaul how they calculate and manage counterparty credit risk," said Rohan Douglas, CEO of Quantifi. "The standard is being set by the largest global banks which now actively manage counterparty risk, calculate sensitivities, and price CVA for new trades using integrated solutions based on netting and collateral agreements. Given the portfolio level scope and the analytical complexity, existing technology infrastructures have constrained many banks from achieving best practices.”

To be sure, Standard & Poor's has long vocalized that one of the key exposures in a securitization transaction is counterparty risk.

The rating agency said in a report on the subject, that in recent years a lot of focus within the catastrophe bond area of securitization has been on collateral risk, but often the real risk to collateral is actually the risks associated with the counterparty who could be providing that collateral (Lehman Brothers as an example).

S&P said that the financial disruptions of the last few years have reiterated that this is a risk that cannot be ignored and they stress that counterparty risk should not be overlooked.  

The rating agency earlier this year updated its counterparty rating criteria to better establish a more precise link between the rating of an issue and the counterparty's rating based on the type of support provided by the counterparty.

The overall principle behind its updated counterparty criteria is the concept of counterparty replacement in a structured finance deal in case its creditworthiness deteriorates. Analysts said that without such a replacement mechanism or any other mitigating factors, the security's rating would usually be no higher than the counterparty's credit rating. They explained that any uplift for a structured finance note will depend on the type of counterparty obligation.


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