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The xVA Challenge: Counterparty Credit Risk, Collateral, Funding and Capital

Day One

Basics and Counterparty Credit Risk

Introduction

  • Overview and historical background
  • The impact of regulation and accounting
  • The importance of capital and funding costs
  • What is xVA?

Collateral and Discounting

  • Variation margin
  • Collateral discounting
  • Collateral optionality
  • Funding and discounting
  • Initial margin

Counterparty Credit Risk

  • Credit exposure
  • Credit limits and PFE
  • Expected MTM (EMTM)
  • EPE and ENE
  • Incremental and marginal exposure

Example: PFE example

Mitigating Counterparty Risk

  • Netting
  • Portfolio compression
  • Collateral
  • Central counterparties

Example: Compression example

Day Two

Credit and Funding (CVA/FVA)

Exposure Simulation

  • Challenges of exposure simulation
  • Models and calibration for each asset class
  • Implementation of exposure simulation
  • Modelling collateral

Example: FX Forward and IRS exposure simulation

CVA and DVA

  • Proxy spread approaches
  • CVA formulas
  • Impact of collateral on CVA
  • Bilateral CVA

Example: CVA/DVA calculation

Funding and FVA

  • NSFR and LCR
  • FVA formula and link to discounting approach
  • CVA/DVA/FVA framework
  • Symmetry of FVA

Example: FVA calculation

Managing and Hedging xVA

  • Bank approaches to hedging xVA
  • xVA greeks
  • Hedging instruments
  • P&L explained and hedging performance

Example: xVA hedging simulations

Day Three

Capital and Initial Margin (KVA/MVA)

Regulatory Capital Requirements

  • Counterparty risk capital requirements
  • Cleared vs. uncleared capital requirements
  • Review of capital methodologies
  • SA-CCR
  • The leverage ratio

Example: SA-CCR vs. IMM

Capital and KVA

  • Capital value adjustment (KVA)
  • KVA management strategies
  • Initial margin in SA-CCR and IMM approaches
  • FRTB and BA-CVA / SA-CVA

Example: KVA calculation

Initial Margin and MVA

  • Bilateral margin rules
  • CCP initial margin methodologies
  • The ISDA Standard Initial Margin Model (SIMM™)
  • MVA

Example: SIMM and MVA calculations

xVA Examples and Optimization Strategies

  • Treatment of hedges under CVA capital rules
  • xVA examples under different CSAs
  • Change in CSA terms
  • Funding optimization
  • The impact of initial margin on CVA and KVA


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