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Counterparty Credit Risk Management Systems 2011

Counterparty credit risk (CCR) has become a major focus for financial institutions (FIs) since the global financial crisis. Concerns over CCR were significantly heightened in 2008-2009 when a number of systemically important firms defaulted on their debt and swap obligations resulting in the high profile collapses of FIs such as Bear Sterns and Lehman Brothers.

 

Not surprisingly, regulators have been drawing up rules on how CCR can be mitigated and reduced. The proposals behind Basel III, for example, are designed to specify FIs’ capital requirements with a view to reducing CCR. Measures include a capital charge for the credit valuation adjustment (CVA), enhanced stress testing and the use of central counterparties (CCPs) for certain transactions.

 

In this report, Chartis has surveyed the leading CCR technology vendors. Most of the vendors have taken an approach of extending and enhancing their current credit risk management solutions and/or trading systems to provide additional counterparty credit risk functionality and reporting. For many of these vendors CCR does not form part of their core R&D strategy and is not a significant part of their product roadmap. This approach is satisfactory for FIs that have the same view point regarding CCR and the associated Basel III requirements.  However, FIs that view Basel III and CCR as a more significant and strategic opportunity need to look for more complete, sophisticated and modular solutions. These solutions will have advanced and flexible data management and modeling functionality (e.g. advanced CVA, wrong-way risk, real time) that can be tailored and integrated to meet the specific needs of the end-users.

 

Vendors covered in this report include: Algorithmics, FinArch, FRSGlobal, Imagine, Kamakura, Misys, MSCI, Murex, Numerix, OpenLink, Razor, SAS, SunGard, Thomson Reuters and UBS.