Counterparty Credit Risk for Financial Institutions
DESCRIPTION
This workshop teaches how to measure and manage counterparty credit risk. Participants will learn to distinguish between market risk and credit risk, to quantify the credit risk associated with basic market transactions, and how the structure of transactions impacts the level of credit risk.
In addition, participants will learn techniques for evaluating the creditworthiness of common market counterparties: banks, broker/dealers and hedge funds. Topics include industry, business and financial risk analysis. Finally, the workshop covers the trading products and strategies commonly used by market counterparties.
The workshop uses several cases and exercises to demonstrate, practice and review the concepts presented in class. Participants will work in small groups throughout the workshop to prepare these materials.
TARGET AUDIENCE
- Professionals with one to four years experience in the financial services industry whose work involves analyzing financial institutions or measuring or managing counterparty credit risk.
OBJECTIVES
- Understand the components of counterparty credit risk
- Analyze counterparty risks and distinguish from traditional lending exposures
- Explain netting, collateral requirements, guarantees and documentation of alternative exposures
- Anticipate legal and regulatory issues raised by different counterparties
- Analyze key financial statements of banks, broker-dealers, money managers, and hedge funds
PREREQUISITES REQUIRED
As preparatory work, participants should have completed courses in Financial Math Fundamentals and Yield Curve Dynamics; Tools of Risk Analysis; Interest Rate Swaps.
Participants should be able to read and interpret company financial statements and calculate simple ratios. In addition, they should be proficient with a financial calculator such as the HP-12C or HP-19BII (and should bring a calculator to class).
- Workshop introduction
- Instructors’ experience
- Curriculum outline, background and purpose
- Review of mutual objectives
- What is counterparty credit risk? - Market risk vs. credit risk - Counterparty credit risk vs. traditional lending credit risk - Settlement risk - Over-the-counter vs. exchange transactions
- Measuring counterparty credit risk - an introduction - Potential credit exposure, credit quality, and recovery rate - Expected vs. maximum exposure - Patterns of exposure
- Purposes and process
- Structure of the counterparty - Jurisdiction - Subordination
- Netting
- Collateral
- Guarantees
- Documentation
- Credit quality - what is it?
- Sources of information
- Industrials vs. financial institutions
- Credit ratings - Notching - Issuer vs. issue ratings - Unrated entities
- Nature of the business
- Economic and industry risk
- Market position, management and strategy
- Credit risk
- Market risk
- Funding, liquidity and risk management
- Capitalisation and earnings
- Regulatory framework
- CAMELS
- Fixed income
- Foreign exchange
- Equity
- Internal models for measuring risk
- Swaps
- Options
- Foreign exchange
- Other transactions
- Credit approval
- Credit monitoring
- Interaction between sales & trading and credit
- Legal issues
- ISDA
- Jurisdictional issues
- Internal procedures
- Review of subjects and themes discussed
- Review of objectives
- Final questions and answers
- Complete feedback forms
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