Professional Documents
Culture Documents
A Survey by the
Professional Risk
Managers International
Association
NOVEMBER
2008
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ABOUT PRMIA
PRMIA is the Professional Risk Managers International Association. Formed in January 2002,
PRMIA sets a higher standard for risk professionals with more than 65 chapters around the
world and over 55,000 members from more than 180 countries. A non-profit, member-led
association, PRMIA is dedicated to defining and implementing the best practices of risk
management through education, certification, events, networking, and online resources.
More information can be found at www.PRMIA.org.
Contact PRMIA at surveys@prmia.org
T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N AT I O N A L A S S O C I AT I O N
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INTRODUCTION
ounterparty risk has never been of more importance than now. We are
experiencing a maelstrom in the capital markets the likes of which has not
been seen since the great depression of the 1930s. We have seen recurring
banking disasters as Wall Street and the City of London watched centuries-old
institutions fail, be absorbed by others or be bailed out by government support.
The prospect of a bulge-bracket primary dealer being allowed to fail seemed almost
inconceivable as recently as a year ago. Now this remote possibility has become a
reality. Similarly inconceivable was a situation where hedge funds would be more
concerned about the creditworthiness of their prime brokers than vice versa.
The sense of crisis has been massively exacerbated by a lack of timely and reliable
risk information at many institutions that hampered their ability to react effectively.
When it takes weeks to compile a comprehensive report on all your exposures to a
given counterparty you cannot hope to be able to react to daily events.
In the present circumstances, it is hardly surprising to observe such urgency among
banks to reassess their counterparty risk management, methodologies and systems.
It is with this urgency in mind that SunGard, in conjunction with the Professional Risk
Managers International Association (PRMIA), launched the following survey into
counterparty risk. The questions are designed to explore best practices in the areas of
risk policies, exposure measurement and systems. Responses were provided by more
than 450 risk professionals from around the world.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y R E S U LT S
Please assess the importance of the following features of a credit exposure monitoring system.
0%
20%
40%
60%
80%
100%
Very Important
Somewhat Important
Somewhat Unimportant
Not Important
FIGURE 1
Tied for 1st and 2nd in terms of importance were accuracy of exposure estimates and
flexibility of the limit structures the system can handle.
In 3rd place was gaining a consolidated exposure view across derivatives, issuer risk
and banking book.
4th place was tactical decision support such as pre-deal checking and not just afterthefact reporting.
Exposure sensitivity analysis is not widely available in existing systems. The resulting
unfamiliarity with the concept is likely to be the reason that a somewhat smaller share
of respondents rated it as Very important or Somewhat important. Nevertheless,
almost half of all respondents rated it Very important and another 36% rated it
Somewhat important. Recent fears concerning the stability of even major financial
institutions is likely to have boosted the perceived importance of this functionality.
Generally work flow and presentation functionality were viewed as desirable but less
important than the analytical core of the system.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y R E S U LT S
With respect to the real-time aspect, how should
exposure updates be applied, including those
from what-if pre-deal checks?
42%
29%
58%
Although the responses were relatively mixed with a combination of the above being the most popular choice, the
most surprising result was the low vote (11%) for checking
against allocated sub-limits versus a central credit system.
These answers may well be influenced by the respondents
perception of the possible alternatives based on their
individual experience. Nevertheless, most of the market has
come to the logical conclusion that risk is a portfolio issue
and that counterparty credit risk must be treated accordingly.
In many banks the reality is that risk managers are woefully
short of the information they need to assess counterparty
risk accurately. While this is a regrettable state of affairs, the
upside is that recent events may act as the overdue catalyst
needed to support a portfolio approach to credit risk.
68%
FIGURE 3
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S U R V E Y R E S U LT S
Should pre-deal limit checks also provide an
indication of the cost-of-credit (CVA = Credit
Valuation Adjustment)?
20%
30%
16%
70%
Provisions required to cover expected losses.
23%
27%
No, this should be kept separate to limit checking.
Ideally, yes, but this is technically not feasible.
Yes, although the CVA indication may be based on a gross
calculation, and may therefore not include all portfolio effects.
Yes, and the calculation should consider incremental
FIGURE 5
portfolio effects.
FIGURE 6
In the development of risk systems there is always a tradeoff between the cost of development and the value of the
system but in this respect there seems to be an underestimation of the technology possibilities. This may be because
many respondents have come from an in-house technology
background an environment where it is harder to take a
long-term perspective to development due to the budgetary
constraints. Typically systems are developed to fill only the
immediate need. Additionally the amount of consolidation
in the banking sector of late means that many banks
development plans are hampered by the volume of
necessary integration work.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y R E S U LT S
When combining derivative (counterparty) exposures with lending exposures, what is the most
appropriate measure?
A surprising share of respondents (39%) opted for PFE at a
given confidence level (e.g. 95%) although an equal number opted for either EPE (9%) or a hybrid measure between
EPE and PFE (30%). It is possible that some respondents
did not understand the question in the anticipated manner
that the issue is how to set relationship caps that include
both banking book loan exposures and derivative credit
exposure. The banking book component is usually stated in
terms of outstanding loan exposure and the question is
what measure for derivative credit exposure should count
against the cap.
6%
9%
39%
16%
30%
Potential Future Exposure at a given
confidence level ( e.g. 95%).
Expected exposure.
A hybrid measure in-between EE
and PFE.
Notional Amount.
Current MtM exposure.
FIGURE 7
20%
40%
60%
80%
100%
Very Important
Somewhat Important
Somewhat Unimportant
Not Important
The ability to set (and by implication to track and control) limits on maximum exposure to an issuer
was the overwhelming favourite, although all the options were deemed very important or somewhat
important by an overwhelming majority of respondents. Monitoring concentrations and viewing issuer
risk along side other credit risks were considered to be the next most important features. What these
responses reflect is the importance of flexibility to configure counterparty risk systems to individual
institutional preferences.
T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N AT I O N A L A S S O C I AT I O N
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S U R V E Y R E S U LT S
How should issuer exposures (arising from holdings in securities positions) be monitored?
14%
37%
24%
62%
11%
Notional amount.
Market value.
50%
Historical cost.
FIGURE 9
FIGURE 10
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y R E S U LT S
With respect to Banking Book exposures (loans,
LCs, etc.), how should one monitor the compliance with the terms of individual facilities?
26%
12%
63%
43%
31%
The global limits system should monitor the overall customer
exposure, but not the terms of each facility; the latter would be
the role of a dedicated Banking Book system, e.g. a loan
administration system or a facility management system.
In addition to the overall customer exposure, the global limits
system should also monitor the essential elements of each
facility, e.g. the facility limit and facility tenor. Other terms
(e.g. the permissible drawdown methods, subfacility limits,
etc.) should be monitored by the loan administration system.
The global limits system should monitor compliance with all
terms and conditions of banking book facilities.
FIGURE 11
FIGURE 12
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S U R V E Y R E S U LT S
What best describes your opinion about limit
excesses?
11%
2%
12%
9%
49%
31%
40%
37%
Product groups.
Excesses are a necessary evil that have to be
dealt with as efficiently as possible.
Business areas.
Local branches.
FIGURE 14
FIGURE 13
Half of the respondents opted for the safety of A combination. 31% chose a single global limit per counterparty. One
comment pointed out the need to differentiate by documentation, although this is not necessary as long as netting is
handled properly. In the absence of a proper exposure
simulation methodology, segregation by agreement does
indeed make sense.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y R E S U LT S
How should collateralised exposures (under ISDA
CSA) be measured?
17%
24%
61%
41%
15%
42%
FIGURE 16
FIGURE 15
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S U R V E Y R E S U LT S
How should guaranteed exposures be measured
(including exposures protected by credit
derivatives)?
25%
1%
26%
67%
75%
Very important.
Somewhat unimportant.
Somewhat important.
Not important.
FIGURE 18
FIGURE 17
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y R E S U LT S
How long would you expect the implementation of a global credit exposure & limits system to take?
0%
10%
5%
15%
9.9%
9 months.
26.3%
12 months.
4.7%
12.9%
18 months.
16.1%
24 months.
30%
14.9%
6 months.
30 months.
25%
5.7%
3 months.
15 months.
20%
2.5%
6.9%
FIGURE 19
Most respondents who commented emphasised the heavy dependence on the size and complexity
of the organisation and its trading activities. In some cases there was also confusion about whether
this was the time to build a system from scratch or to deploy a system already well developed but
requiring some configuration or customisation. One respondent even offered a formula, namely
2 years (Tier * 6 months). This appears to mean 18 months for a Tier 1 organization and as
little as 6 months for a Tier 3 organization. In general, these are not unreasonable figures for
deployment of a fairly well developed system but when applied to the development of a system
from scratch to full deployment seems an overly aggressive timetable.
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T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N AT I O N A L A S S O C I AT I O N
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CONCLUSION
he current crisis has enhanced awareness of the need for reliable, timely and
sophisticated counterparty credit exposure and credit risk information. There is
a growing recognition that this has to be undertaken at a portfolio level, using
appropriately sophisticated risk measures. Enhanced analysis to identify wrongway risk
and portfolio sensitivities is getting much more attention than even a year ago.
This survey indicates significant recognition of the importance of more detailed, more
comprehensive and more timely information on counterparty credit exposure and credit
risk. There is however disagreement on the exact detail of how best to achieve this. This
highlights the importance that vendors must place on flexibility and the ability of users
to customize counterparty risk systems to accommodate the views of their own
institutions. The task of deploying, maintaining and upgrading effective counterparty
credit systems remains a daunting one. Nevertheless, regulators, investors and the
general public will expect better performance in the future than has been evident in the
recent past.
Without a doubt both financial institutions and vendors will face serious challenges in
coming years to meet the demands for better counterparty credit risk management
information. The good news is that the tools, techniques and systems already exist
which will form the underlying architecture for such solutions. Now is the time for
institutions to invest in updating their risk infrastructures so that, next time around,
they are able to respond to fastchanging market conditions in minutes rather than days.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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