Cover image not available
List of Spreadsheets xix
List of Appendices xxi
Acknowledgements xxiii
About the Author xxv
1 Introduction 1
2 The Global Financial Crisis 3
2.1 Pre-crisis 3
2.2 The crisis 5
2.3 Regulatory reform 8
2.4 Backlash and criticisms 8
2.5 A new world 10
3 The OTC Derivatives Market 11
3.1 The derivatives market 11
3.1.1 Derivatives 11
3.1.2 Exchange traded and OTC derivatives 12
3.1.3 Market size 12
3.1.4 Market participants 14
3.1.5 Credit derivatives 16
3.1.6 The dangers of derivatives 17
3.1.7 The Lehman experience 17
3.2 Derivative risks 18
3.2.1 Market risk 18
3.2.2 Credit risk 19
3.2.3 Operational and legal risk 19
3.2.4 Liquidity risk 20
3.2.5 Integration of risk types 20
3.2.6 Counterparty risk 20
3.3 Risk management of derivatives 20
3.3.1 Value-at-risk 20
3.3.2 Models 23
3.3.3 Correlation and dependency 23
4 Counterparty Risk 25
4.1 Background 25
4.1.1 Counterparty risk versus lending risk 25
4.1.2 Settlement and pre-settlement risk 26
4.1.3 Mitigating counterparty risk 28
4.1.4 Exposure and product type 29
4.1.5 Setups 31
4.2 Components 32
4.2.1 Mark-to-market and replacement cost 33
4.2.2 Credit exposure 33
4.2.3 Default probability, credit migration and credit spreads 34
4.2.4 Recovery and loss given default 35
4.3 Control and quantification 36
4.3.1 Credit limits 36
4.3.2 Credit value adjustment 38
4.3.3 CVA and credit limits 38
4.3.4 What does CVA represent? 39
4.3.5 Hedging counterparty risk 41
4.3.6 The CVA desk 42
4.4 Beyond CVA 43
4.4.1 Overview 43
4.4.2 Economic costs of an OTC derivative 43
4.4.3 xVA terms 44
4.5 Summary 46
5 Netting, Close-out and Related Aspects 47
5.1 Introduction 47
5.1.1 Overview 47
5.1.2 The need for netting and close-out 47
5.1.3 Payment and close-out netting 48
5.2 Default, netting and close-out 49
5.2.1 The ISDA Master Agreement 49
5.2.2 Events of default 49
5.2.3 Payment netting 50
5.2.4 Close-out netting 51
5.2.5 Product coverage and set-off rights 52
5.2.6 Close-out amount 53
5.2.7 The impact of netting 55
5.3 Multilateral netting and trade compression 56
5.3.1 Overview 56
5.3.2 Multilateral netting 56
5.3.3 Bilateral compression services 57
5.3.4 The need for standardisation 58
5.3.5 Examples 58
5.4 Termination features and resets 61
5.4.1 Walkaway features 61
5.4.2 Termination events 62
5.4.3 Reset agreements 64
5.5 Summary 65
6 Collateral 67
6.1 Introduction 67
6.1.1 Rationale for collateral 67
6.1.2 Analogy with mortgages 69
6.1.3 Variation margin and initial margin 69
6.2 Collateral terms 70
6.2.1 The credit support annex (CSA) 70
6.2.2 Types of CSA 71
6.2.3 Threshold 73
6.2.4 Initial margin 74
6.2.5 Minimum transfer amount and rounding 74
6.2.6 Haircuts 75
6.2.7 Linkage to credit quality 77
6.2.8 Credit support amount 78
6.2.9 Impact of collateral on exposure 79
6.3 Mechanics of collateral 80
6.3.1 Collateral call frequency 80
6.3.2 Valuation agents, disputes and reconciliations 81
6.3.3 Title transfer and security interest 82
6.3.4 Coupons
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The xVA challenge : counterparty credit risk, funding, collateral, and capital by Jon Gregory. ISBN 9781119109433. Published by John Wiley & Sons in 2015. Publication and catalogue information, links to buy online and reader comments.