Major European Bank
When it comes to the financial marketplace, the future is hard to predict. Fortunately, QuIC solutions can lower the volatility of your profit and loss, while increasing return on capital.
The Client: An international banking and financial services organisation, based in Western Europe with a presence in 60 countries. This client placed a major focus on multinationals and financial institutions.
The Challenge: The client has a big task on its shoulders. It actively manages the Over the Counter (OTC) derivative credit exposure risk of over 3,000 counterparties. As a result, the solutions they require need to be fine-tuned to their market. Specifically, they required the simulation of correlated market and credit risks factors in order to price and hedge the associated risks.
Their requirements didn’t end there. They also needed effective, timely pricing and risk management of Contingent CDS (CCDS) transactions for their Contingent Credit Trading Group. For this client, CCDS are internal deals to which the client assigns credit intermediation fees. These are then charged to the origination desk on a pre-trade basis. These fees are used to mitigate credit and market risk exposure by purchasing relevant hedges.
The process is a complex one. That’s because calculating the credit intermediation fee requires thousands of joint simulations over several hundred time steps. It also requires the accurate representation of collateral dynamics and netting rules. This presents substantial modelling and computational challenges. Moreover, to effectively manage the risk for hedging purposes, a number of hedge parameters must be computed for both market and credit risk factors. These calculations must calibrate to front office pricing and be done accurately and quickly to ensure business continuity at the origination desk. This also enables the credit exposure management group to dynamically re-balance the hedges through time.
With these challenges in mind, QuIC reviewed the client’s existing solutions at the time. Prior to implementing QuIC’s CVA Portfolio Management Solution, their risk analytics tools seriously restricted their trading potential. The CCDS computation for all counterparties took up to four days to run, and even then, the tool was incapable of accounting for all risk factors.
The Solution: The client implemented QuIC’s CVA Portfolio Management Solution, a fast and flexible risk management and analytics framework. This solution is specifically designed to measure and manage credit exposure and trading contingent credit products of all types. What’s more, it performs complex analytics with exceptional speed and provides contingent credit trading desks with unmatched power and agility to manage lines of credit, in near real-time.
At the core of the solution lies the QuIC Engine™, an exceptionally fast vector-based calculation and simulation platform, performing tasks in seconds that can take other systems hours to complete. In addition, QuIC built a customised decision-support trading tool to assist the client in their hedge construction process.
Given the uniqueness of the client’s needs, QuIC’s first steps were to investigate and collaborate with the client.
“This client was especially appreciative of the time and energy we invested in understanding their business and specific requirements,” said Nigel Cairns, President and CEO of QuIC. “Of course, our extensive industry experience helped, but this implementation of QuIC’s CVA Portfolio Management Solution was really the result of a partnership between the client and our developers.”
The Result: As a direct result of our solution, the client has dramatically improved their ability to manage credit exposure. With the QuIC Engine at the heart of the solution, the client can now:
- Enjoy significant improvements to their return on regulatory and economic capital and earnings
- Benefit from a reduction in profit/loss volatility and an increased capacity for new business
- Direct deal origination towards “high-value” business
- Calculate CCDS prices and hedge parameters for all counterparties in a matter of hours rather than days
- Calculate the credit intermediation fee easily at the point of origination
- Rerun calculation on demand throughout the trading day, thereby improving trading efficiency and ultimately, the bottom line
Perhaps most substantially, the bank has managed this paradigm shift in credit mitigation and capital management with a significant cost savings in hardware, as a direct result of the QuIC Engine.
QuIC’s CVA Portfolio Management Solution
QuIC’s CVA Portfolio Management Solution pairs front-office pricing accuracy with fast portfolio repricing. This allows clients to determine accurate CCDS prices and tie hedges to exposure calculations, allowing them to manage their capital effectively and free up lines of credit.