Company: Major European Bank
QuIC Credit Valuation Adjustment Solution™ increases return on capital and lowers volatility of P&L
The Client
An international banking and financial services organisation, based in Western Europe, with a presence in 60 countries, and a major focus on multinationals and financial institutions.
The Challenge
The client actively manages the Over the Counter (OTC) derivative credit exposure risk of over 3,000 counterparties. The management of counterparty exposure of complex derivatives portfolios requires the simulation of correlated market and credit risks factors to properly price and hedge the associated risks.
The client achieved significant improvements to their return on regulatory and economic capital and earnings, a reduction in profit/loss volatility, an increased capacity for new business and helped direct deal origination towards “high-value” business. This capability hinges on 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.
Calculating the credit intermediation fee requires the counterparty’s entire OTC portfolio to be priced using thousands of joint market/credit 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, enabling traders to make critical decisions. This also enables the credit exposure management group to dynamically re-balance the hedges through time.
Prior to implementing the QuIC CVA solution, the client’s 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 the QuIC Credit Valuation Adjustment Solution™, a fast and flexible risk management and analytics framework, designed for the specific needs of professionals involved in measuring and managing credit exposure and trading contingent credit products of all types. 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 on how to implement this solution. According to Nigel Cairns, President and CEO of QuIC, “This client was especially appreciative of the time and energy we invested in understanding their business and specific requirements. Of course, our extensive industry experience helped, but this implementation of the QuIC Credit Valuation Adjustment Solution was really the result of a partnership between the client and our developers.”
After implementing the QuIC Credit Valuation Adjustment Solution™, this client has dramatically improved their ability to manage credit exposure. With the QuIC Engine at the heart of the solution, the client can now calculate CCDS prices and hedge parameters for all counterparties in a matter of hours rather than days. The credit intermediation fee can easily be calculated at the point of origination, and this calculation can be rerun on demand throughout the trading day, thereby improving trading efficiency and ultimately, the bottom line.
QuIC accuracy improves efficiency of capital management
The QuIC Credit Valuation Adjustment Solution™ marries front-office pricing accuracy with fast portfolio repricing. The improvement in accuracy allows the client to determine accurate CCDS prices and tie hedges to exposure calculations, thereby allowing them to manage their capital effectively and free up lines of credit, with minimal hedging costs. Amazingly, the bank has managed this paradigm shift in credit mitigation and capital management with a substantial cost savings in hardware costs, due to speed of the QuIC vectorised calculation engine.
Implementation of the QuIC Credit Valuation Adjustment Solution™ not only met but also exceeded the client’s expectations, with QuIC once again delivering the solution – on time and on budget.
The QuIC Credit Valuation Adjustment Solution™ performs complex analytics with exceptional speed, to provide credit exposure management desks with unmatched power and agility in managing lines of credit. It is a flexible risk management framework, designed for the specific needs of professionals involved in measuring and managing credit exposure and trading contingent credit products of all types.
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