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How do you ensure compliance in a fast changing environment?
Data, technological, and operational challenges involved in implementing a counterparty credit risk management process can be overwhelming. The regulatory workload will consume an ever greater proportion of resources as we expect regulators will require clients to perform more calculations, submit more data, metrics, exposure aggregation and concentration management, stress testing results, etc.
The federal bank regulatory agencies (Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, Office of Thrift Supervision) issued guidance to help ensure banking organizations practice effective counterparty credit risk (CCR) management.
The guidance emphasizes that banking organizations should use appropriate reporting metrics and exposure limits systems, have well-developed and comprehensive stress testing, and maintain systems that facilitate measurement and aggregation of CCR across the organization.
In order to facilitate our clients needs to adapt to the regulatory environment without sacrificing efficiency and performance we have built specific functionality which is listed by each PrevioRisk module.
- A sufficiently comprehensive range of CCR metrics, as discussed in the CCR metrics section.
- Major dealers and large, sophisticated banking organizations with substantial CCR exposure should measure and assess: Points are covered independently hence N/A
- Internal capital adequacy models should incorporate CCR.
- Deploy adequate operational resources to support reconciliations and related analytical and remediation processes.
- Reconcile positions and valuations with counterparties.
- Large counterparties should perform frequent reconciliations of positions and valuations (daily if appropriate).
- For smaller portfolios with non-dealer counterparties where there are infrequent trades, large dealers should ensure the data integrity of trade and collateral information on a regular (but not necessarily daily) basis, reconciling their portfolios according to prevailing industry standards.
- Reconcile exposure data in CCR systems with the official books and records of the financial institution.
- Maintain controls around obligor names at the point of trade entry, as well as reviews of warehoused credit data, to ensure that all exposures to an obligor are captured under the proper name and can be aggregated accordingly.
- Maintain quality control over transfer of transaction information between trade capture systems and exposure measurement systems.
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Harmonize netting and collateral data across systems to ensure accurate collateral calls and reflection of collateral in all internal systems.
Banking organizations should maintain a robust reconciliation process, to ensure that internal systems have terms that are consistent with those formally documented in agreements and credit files. - Remediate promptly any systems weaknesses that raise questions about the appropriateness of the limits structure. If there are a significant number of limit excesses, this may be a symptom of system weaknesses, which should be identified and promptly remediated.
- Eliminate or minimize backlogs of unconfirmed trades.
- Automation and Tracking hence N/A
- Increase automation of margin processes and continue efforts to expand automation of OTC derivatives post-trade processing. This should include automation of trade confirmations, to reduce the lag between trade execution and legal execution.
- Maintain default monitoring processes and systems.
- To mitigate measurement distortions, banking organizations should:
- Review the use of add-on methodologies at least annually. Current or planned significant trading activity should trigger efforts to develop appropriate modeling and systems, prior to or concurrent with these growth plans.
- Establish growth limits for products with material activities that continue to rely on add-ons. Once systems are improved to meet a generally accepted industry standard of trade capture, these limits can be removed.