Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

19.3 The Continuing Challenge for Global Financial Markets

Counterparty credit risk and CVA is a subject that will dominate practitioners, policymakers and academics for years. Banks and other institutions need to find the right way to manage their counterparty risk whether they have just a few or thousands of counterparties. CVA desks or groups will become the norm across banks and some other large financial institutions or significant derivatives users. Modellers need to work on the best and most pragmatic approaches to quantifying CVA. Technologists need to find the most efficient and cost-effective ways to implement systems that can cover all aspects of counterparty risk across products and counterparty type, providing real-time pricing and hedging together with accounting, reporting and regulatory functionality. Approaches to aspects such as DVA and wrong-way risk will be debated and improved upon recursively. Peripheral areas such as risk-free valuation and funding (FVA) will be studied alongside counterparty risk aspects. Regulators will attempt to provide the correct requirements such that institutions are capitalised against counterparty risk without choking economic growth and causing unpleasant unintended consequences.

The counterparty risk cocktail – including CVA, collateral, wrong-way risk, central counterparties, credit derivatives, DVA, FVA and regulatory rules – is likely to produce many headaches over the coming years. However, it is also likely to stimulate much ...