#Counterparty risk #Credit risk #Market risk

Background & challenges

Quantitative mission within the Financial resources management team (FRM) of the front office of a Paris-based CIB called on Quanteam to assist with the Libor transition and RWA-related issues.

The use of Libor (London Interbank Offered Rate) was deemed inappropriate by market players. This was due to manipulation of the said curves and a lack of liquidity. The aim of the Libor transition is to be able to use rates that better reflect market conditions.

In addition, the FRM team needed help with the development and maintenance of VBA tools, and with RWA-related issues.

The completion of this project will not only enable the FRM team to comply with Libor market requirements, but will also provide them with support in the tasks that punctuate their day-to-day work.

Solution provided

The firm supported this CIB with a team of consultants with solid quantitative skills (financial mathematics and programming). The tasks on which we intervened were as follows:

  • Determining the impact of the Libor transition for counterparties with the most trades → calculating the impact on PV of the change in collateral remuneration (from Eonia to Ester, for example), both deterministic (intrinsic component) and stochastic (optionality linked to currency volatility, same phenomenon on bond-repo).
  • Portfolio analysis → determination of potential reductions in RWA and IM (bilateral or cleared) resulting from action on trades such as unwinding, novation, clearing.
  • Development and maintenance of VBA tools used by the team
  • Average RWA savings of around $34m from some 150 trades (cross currency (Xccy), swap (IRS) and swaptions (SWO)) representing a delta of $6.7m and a vega of -3.7m, spread over 9 clients, were achieved through unwinding, clearing and novation processes.
  • A tool for sales staff presenting the level of certain metrics and a reporting tool for the regulator have been produced. Upgrade of a tool presenting delta risk, MtM and vega, as well as another indicating expected npd under a shock scenario.

Customer benefits:

Anticipation of the impact of changes in interest rates (market risk, RWA, credit risk and counterparty risk). Savings on RWA (reduction in equity capital). Improved monitoring for Sales. Anticipation and transparency with the regulator (reporting).

Quanteam expertise makes the difference

  • More than 16 years' project management experience in finance and risk departments in CIBs
  • Expertise in RWA, derivatives and credit, market and counterparty risk
  • Expertise in risk processes and issues, trading and sales.

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