Counterparty Credit Risk in Derivatives

Programme description & objectives

The aim of this three-day course is to enable attendees to identify the key categories and drivers of transaction credit risk in the main derivative products, and to apply a consistent approach to the quantification of these risks. Delegates to this program would avail of expanded knowledge opportunities aimed at: - Understanding the various types of counterparty credit risk occurring in derivative products and repurchase agreements (repos) - Assessing detailed counterparty credit risks in interest rate, foreign exchange, credit derivative, equity, and repo products - Applying lessons learned from the recent crisis to structure & reduce counterparty risk - Calculating the counterparty credit risk of a portfolio of transactions - Analyzing, reversing, and engineering complex derivative transactions to determine counterparty risk

Venues, Dates & Cost

Venues	Dublin	London	Dubai	Edmonton (CAN)	Lagos/Abuja
Dates	TBD	TBD	TBD	TBD	TBD
Cost	$4,000 per participant (USD)				(=N=)

For Whom

Risk Managers
Bankers
Analysts, Controllers and Regulators in the banking sector
Finance and Banking professionals who need to understand how derivative credit risk is measured, mitigated and accounted for in an increasingly complex world.
NB: A basic understanding of derivative product structures is required.

Section A – Analytic Overview

Risk overview
- Differentiating derivative credit risk from other forms of credit risk
- Defining the eight categories of derivative credit risk: current mark-to-market, pre-settlement risk (PSR), settlement risk, payment timing mismatch risk, premium payment risk, lending risk, issuer risk and transfer risk
- Describing different approaches to calculating pre-settlement risk: strengths and weaknesses of the main approaches
- Different measures of pre-settlement risk: Peak Exposure, Average or Loan Equivalent Exposure, calculation and use of the Credit Valuation Adjustment (CVA)
- Stress testing pre-settlement risk: why stress testing is necessary and particular areas of concern
- Different stress test approaches: Hypothetical & Historical stress testing, Expected Shortfall
- Contrasting credit risk and market risk
Derivative Product Categories
- Evolution of different product structures, how they are used, the resulting cash-flows and the credit risks that arise
- Credit risks from the simple to the most complex features
Currency derivatives
- Types of transaction: FX forwards, FX options, and cross currency swaps
- Product structures and cash-flows
- Credit risks, risk drivers and estimating PSR
- Settlement risk: definition and risk mitigation approaches
- Warning signals: Barrier options, embedded loans, and wrong way trades
Interest rate derivatives
- Transaction types: vanilla and structured interest rate swaps, caps, floors and swaptions
- Product structures and cash-flows
- Credit risks, risk drivers and estimation approaches
- PSR exposure estimation: a step-by-step approach
- Quick and dirty estimation of PSR
- Warning signals: embedded loans, impact of timing mismatches
- Common non-standard swaps and their credit risks
Credit derivatives
- Types of transaction
- Credit default swaps (CDS)
- Replication products such as total return swaps and credit spreads products
- Product variants and uses, including portfolio and index swaps, and sovereign CDS
- Specific risks relevant to CDS: default definitions, settlement methods, reference security, corporate events, recovery rates
- Unwind/settlement issues arising from the credit crisis
- PSR methodology: Basic approach and issues to consider
Equity derivatives
- Types of transaction: forwards, total return swaps, options, contracts for difference
- Specific risks relevant to equities e.g. event risk, correlation/wrong way exposures, legal and regulatory issues
- Volatility and variance swaps
- Product structures and the impact on credit risks
Repos
- Product structure
- Comparing repos with buy/sellbacks and secured loans
- Credit risks

Section B – Managing Exposures

Documentation
- Key documents: ISDA agreement (ISDA) and credit support annex (CSA)
- General structure of the ISDA agreement
- Key credit issues to be considered in negotiating an ISDA and a CSA
- Considerations in the event of a default
Credit mitigation
- Credit mitigation techniques: collateral, netting, early termination, cash settlement, resets, guarantees, CDS
- Uses and potential problems with the different mitigation techniques
- Focus on collateral: types, haircuts, risks and exposure calculation
- Initial and variation margin arrangements
- Threshold arrangements
Combining exposures
- How credit limit structures deal with credit risk on a portfolio basis
- Key issues in exposure aggregation and how aggregation works in practice
- Combining exposures while capturing portfolio effects
- Key challenges: different maturities, offsetting deals
Unbundling basics and complex transactions
- Reverse engineering a complex trade into its components
- Structured approach to assessing complex trades
- How options are used in complex transactions