LIBOR TRANSITION AND IMPACT ON RWA
Background & Challenges
A quantitative analyst on the Financial Resources Management (FRM) team within the front office of a Paris-based commercial bank engaged Quanteam to assist with the Libor transition and matters related to risk-weighted assets (RWAs).
Market participants have deemed the use of Libor (London Interbank Offered Rate) rates inappropriate. This is due to manipulation of these rates and their lack of liquidity. The goal of the Libor transition is to be able to use rates that better reflect market conditions.
In addition, the FRM team needed assistance with the development and maintenance of VBA tools and with issues related to RWA
The completion of this project will enable the FRM team to meet market requirements regarding Libor, while also providing support for the day-to-day tasks that are part of their routine.
Solution
The firm supported this BFI with a team of consultants possessing strong quantitative skills (in financial mathematics and programming). The tasks we handled are as follows:
- Determining the impact of the Libor transition on counterparties with the highest number of trades → calculating the impact on the mark-to-market value of changes in collateral remuneration (from Eonia to Ester, for example), including both deterministic (intrinsic component) and stochastic (volatility-related optionality) impacts (the same phenomenon applies to bond repos).
- Portfolio analysis → identification of potential reductions in RWA and IM (bilateral or cleared) resulting from actions on trades such as unwinding, novation, and clearing.
- Development and maintenance of VBA tools used by the team
- Savings on average RWA totaling approximately $34 million, resulting from roughly 150 trades (cross-currency (Xccy), swaps (IRS), and swaptions (SWO)), representing a delta of $6.7 million and a vega of -$3.7 million, spread across 9 clients, were achieved through unwinding, clearing, and novation processes.
- A tool for sales representatives displaying certain metrics and a reporting tool for the regulator were developed. An upgrade to a tool displaying delta risk, MtM, and vega, as well as another tool showing expected P&L under a shock scenario, were implemented.
Benefits for the customer:
Forecasting the impact of rate changes (market risk, RWA, credit risk, and counterparty risk). Savings on RWA (reduction in capital requirements). Improved monitoring for sales teams. Proactive communication and transparency with regulators (reporting).
Quanteam’s expertise makes all the difference
- More than 16 years of experience in project management within the finance and risk departments of commercial banks
- Expertise in RWA, derivatives, and credit, market, and counterparty risk
- Expertise in processes and issues related to risk, trading, and sales.
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