Quantifi newsletter - Insight 2011-Q1


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Quantifi newsletter - Insight 2011-Q1

  1. 1. INneWsletteR IssUe 01 SIGHT 2011Basel III andsystemIc RIsk also in this issue: Q&a with John Burkert of tiden capital - Page 3 accounting for changes in Valuation - Page 6 Quantifi Releases QX - Page 8
  2. 2. MESSAGE NEWSFROM Client News:THE CEO Channel Capital Selects Quantifi Risk In response to growing business demands, Channel Capital was seeking a platform that could scale with the firm’sAs we start 2011, we see signs of a continued global recovery. growth in terms of volume and productWhile there are still concerns regarding European debt, key range and deliver timely trade processing,economies, including those in emerging markets are showing valuations and comprehensive riskstrength. This is a market that presents unique opportunities analysis. “Our decision to choose Quantifithat benefit those who can react rapidly. It is also a market Risk was based on its relatively shortthat presents many challenges. Changes to OTC valuation implementation time, ease of use andpractices, central clearing, Solvency II, Basel III and other broad functionality.” commented Brianregulatory initiatives all require a significant focus on analytics Naini, Chief Risk Officer and Partner atand technology and are expensive and time consuming to Channel Capital.implement. This is an environment where Quantifi provideseven more value to our clients by providing tools that deal WestLB Selects Quantifi CVAsmoothly with these challenges and allow them to focus on and WestLB was looking for a fast,respond immediately to market opportunities as well as risks. flexible and intuitive CVA solution toThe last year has been a busy and exciting one for Quantifi with competitively and accurately price CVAssignificant new product initiatives and success in new markets. in near real-time. Quantifi CVA proved toIn 2010 we launched a new suite of solutions addressing be the ideal solution, as the semi-analyticcounterparty credit risk – a key issue for banks and larger buy models deliver superior performanceside institutions. These solutions received immediate market without compromising accuracy.pickup and industry accolades with licensing by WestLB andwinning of a 2010 Credit Technology Innovation award. That Product News:year we also were the first vendor to release support for dual-curve interest rate valuation – reflecting the profound changes Quantifi Releases QXoccurring in OTC derivatives valuation. Right now we are in Version 10.0 delivers enhanced scalability,the process of rolling out QX (Version 10.0) which has many groundbreaking performance and keysignificant new features and enhancements. These releases improvements in complex OTC valuationclearly demonstrate our continued commitment to innovation. and Counterparty Risk Management. It also provides significantly broader assetAnother highlight over the last year has been our expanded coverage including Hybrids.client base. We added our first clients in France, Hong Kong,and Singapore. I was delighted to welcome BTG Pactual, Quantifi Releases Next GenerationWestLB, OFI Asset Management, StormHarbour Securities, Yield Curve ConstructionOracle Capital, Pine River Capital, ARAM Global and among Quantifi is first to market with amany others to our list of clients. sophisticated and comprehensive set of yield curve-building functionalityWe look forward to 2011 as a year of opportunities as well to support the latest best practice ofas challenges for the OTC markets. I believe Quantifi is well ‘Double-Curve’ interest rate valuation.positioned to help our clients in these evolving markets andlook forward to working closely with them and supporting Quantifi Develops Cutting-Edge CVAtheir success. and Counterparty Risk Solutions Quantifi CVA captures all relevant drivers of the exposure, including correlations and volatilities. Quantifi Counterparty Risk enables firms to proactively manage counterparty and market risk and effectively address CVA accounting requirements and evolvingROHAN DOUGLAS, Founder and CEO regulatory capital standards.02 | www.quantifisolutions.com
  3. 3. Q&aan Interview with John Burkertmanaging Partner at tiden capitalWhat is your area of business and principal activities? $1.7MM over the years and we no longer neededTiden Capital is a private investment company with to hire an additional two resources that were goingover $100 million in assets under management. to be required to continue the development andThe firm is focused on relative value and corporate maintenance of our in-house system, which wasstructured credit opportunities, including CDS and eventually replaced by Quantifi Risk.CDS index tranche products. A further key benefit for Tiden is the ability to keep paceAt the time when you were looking at solutions, what with the changing credit landscape. The Quantifi teamwas the primary business challenge you were looking is dedicated to making sure that models are updatedto address? to reflect both market shifts and the firm’s evolvingWhen we launched our strategy in early 2000’s we strategy. With the move toward the standardised Northdeveloped an internal system to process trades and American CDS contract (SNAC), Quantifi was the firstrun risk aggregation. However, as the firm expanded vendor to develop and release SNAC support, whichwe realised the limitation of our internal systems. Tiden immediately adopted. Furthermore, we nowWith these limitations in mind we decided to partner have in place a scalable and flexible risk platform that iswith a 3rd party vendor that could provide us with the intuitive to use and maintain which gives our investorsnecessary solutions to run our complex investment and prospective investors confidence.strategy and ultimately help drive growth. How have you found your experience workingWhat were you looking for in a vendor solution? with Quantifi?We looked at numerous vendors, but Quantifi was the A key highlight of our relationship with Quantifi is theonly vendor who could provide everything we needed. sheer level of support the firm provides to us. WeWe required a system that could look at individual view the Quantifi team as an extension of our owntrades, model the underlying portfolio and aggregate in-house team. They’re quick to respond and havethe risk on those trades. turned around ad hoc requests within 24 hours. We’ve“ tiden has saved more than $1.7mm over the years ”Why did you decide to work with Quantifi? maintained a long and successful partnership withQuantifi Risk was the perfect turnkey solution. It is Quantifi and are looking to further expand our worksimple, sophisticated and supports a range of financial with them as a result of the widespread benefitsproducts from vanilla instruments to complex structured we’ve experienced.products, while requiring minimal internal infrastructureand internal resource. Furthermore, Quantifi Risk has Tiden Capital’s Implementation of Quantifi Risk Winsan intuitive user interface, something that our internal American Financial Technology Awardsystem lacked. Quantifi was the obvious choice.How has Quantifi helped Tiden?Quantifi has helped Tiden become highly efficient byscaling and growing with minimal further investment inmoney and resources. Tiden has saved more than www.quantifisolutions.com | 03
  4. 4. COVER STORYBasel III andsystemIc RIskby DAVID KELLY, Director of Credit at Quantifi One of the key shortcomings of the first two Basel Accords is that they approached the solvency of each institution independently. The recent crisis highlighted the additional ‘systemic’ risk that the failure of one large institution could cause the failure of one or more of its counterparties, which could trigger a chain reaction.Basel III addresses this issue in two ways – 1) by adds a minimum tier 1 balance sheet leverage ratiosignificantly increasing capital buffers for risks related of 3%, subject to further calibration. there are twoto the interconnectedness of the major dealers and 2) reasons for this addition. First, countries that imposedincentivising institutions to reduce counterparty risk a leverage ratio, e.g., canada, seemed to fare betterthrough clearing and active management (hedging). during the crisis. second, the leverage ratio servessince Basel III may not explicitly state how some as a form of safety net for the capital ratio, which isof the new provisions address systemic risk, some vulnerable to arbitrage in both the numerator (capital)analysis is necessary. and denominator (risk-weighted assets).Basel III Provisions In addition to the leverage ratio, Basel III introducesBasel III substantially raises the amount and quality of a short-term liquidity coverage ratio and a longercore tier 1 capital from 2% to 7%, plus an additional term net stable funding ratio, designed to addresscountercyclical buffer of up to 2.5% and a discretionary the duration mismatches in bank assets and liabilities.surcharge for ‘systemically important’ institutions, Banks fund a substantial portion of assets in thei.e., the big dealers. It also fixes known mispricing repo markets and when these markets froze due toof securitisation risks, which is very important given declining mark-to-market collateral values, inter-bankthe fundamental role of securitisation in the global lending also dried up causing systemic shocks. thebanking system. another key innovation is the inherent link between liquidity and leverage amplified theserecognition that the risk-weighted capital ratio alone is shocks. this linkage comes from widening haircutsnot sufficient. Basel III supplements the capital model on repo collateral, which banks must fund with theirwith a leverage ratio and liquidity requirements. own capital. Ultimately, these liquidity requirementseach of these enhancements has a systemic risk are intended to prevent another ‘run’ on the shadowmanagement objective. banking system and global seize-up of credit.Restricting the leverage of major dealers is clearly One of the critical sources of liquidity risk came fromimportant from a systemic risk perspective. Basel III short-term funding of securitised assets in the repo04 | www.quantifisolutions.com
  5. 5. markets, a practice that banks had ramped up to take around collateral risks and re-hypothecation. clearingadvantage of regulatory arbitrages. Basel I and II also helps immunise the system from the failure of anyunder-priced risk weights for securitisations allowing one big bank. Basel III assigns a minimal (1-3%) riskbanks to increase leverage (and returns). they further weight for cleared transactions, thereby fostering centralincreased leverage by manufacturing additional super clearing and the systemic benefits.senior collateral through re-securitisation (e.g., cdO-squareds). the fact that Basel made no distinction Conclusionsfor re-securitisations encouraged this activity. Banks Whereas Basel III represents progress, there are severalalso moved securitised assets from the banking book ongoing challenges. the first set of challenges has toto the trading book to access the more favourable do with the regulation itself. the timeline provides for acapital treatment. Basel III (II ½) firmly addresses all of phased implementation period extending out to 2019.these regulatory arbitrages while providing a detailed another crisis could certainly occur within that time. While‘carve out’ for dealers with sufficiently robust risk quantitative studies have shown limited impact of themanagement processes. higher capital requirements on the real economy, banks may choose to curtail or exit certain lending businessesalong with the supplemental leverage and liquidity if the returns are too low. a consequence could be themeasures, the core capital model has been enhanced expansion of the unregulated and relatively opaqueto address systemic risks more effectively. capital sector of the shadow banking system to fill the credit gap.models typically involve (monte carlo) simulationsof future market scenarios using historical volatilitiesfor the relevant market factors. an obvious weakness “With the dramatic capitalis that volatility tends to go down in normal (stable)times, resulting in lower capital reserves. correlations increases, Basel III incentivisesalso tend to be under-estimated during normal banks to actively managetimes. conversely, when volatilities and correlationsspike during a crisis, banks are forced to raise capital (hedge) counterparty risk.”and deleverage as credit markets tighten. Basel IIIattempts to mitigate this ‘procyclicality’ through new the second set of challenges is structural. Banks arecapital charges for ‘stressed’ cVa VaR and correlation moving toward active management of counterpartybetween financial intermediaries, which are expected risk. However, there is limited or no liquidity in cdsto more than triple counterparty risk capital. contracts needed to hedge a significant number of counterparties and institutions will continue to manageWith the dramatic capital increases, Basel III a substantial portion of counterparty credit riskincentivises banks to actively manage (hedge) through traditional reserves and exposure limits. thecounterparty risk. many larger banks already hedge a residual counterparty risk portfolio is essentially a poolsignificant portion of counterparty risk through central of loans and therefore fraught with the complexitiescVa desks and there appears to be general consensus of cdO structures. these complexities include modeland movement towards this model, accelerated by specification and configuration, manipulating largeBasel III (and the desire to reduce earnings volatility). and diverse sets of position and market data, andHowever, there are immense operational and practical managing unhedgeable correlation and basis risks.challenges in setting up a cVa desk. the main therefore, counterparty risk portfolios will continue tooperational challenges involve gathering position and be susceptible to large unexpected losses.market data and implementing scalable technologywith robust cVa analytics. some of the practical issues another structural issue is related to clearing.are illiquidity of many names, managing residual While the near zero risk weight encourages dealerscorrelation and basis risks, and handling of dVa. dVa to clear cds and other hedge transactions, not allrepresents a gain (that can never be realised) based products will be cleared, which means a critical masson the credit quality of the trader’s own institution and of bilateral counterparty risk will likely remain in thecan’t be hedged with cds. system. clearinghouses may also specialise in specific products, potentially increasing net counterparty risk.clearly, the best hedge for counterparty risk Finally, a clearinghouse could conceivably fail andis collateral. While dealers typically have margin there is no evidence that the 1-3% risk weighting willagreements between them, central clearing provide an adequate capital cushion to contain thestandardises the process and enforces tighter controls systemic fallout. www.quantifisolutions.com | 05
  6. 6. FEATUREAccounting for theChanges in Valuationby PETER DECREM, Director of Rates at Quantifiand DENISE SOTTILARE, Controller at QuantifiIn the aftermath of the credit crisis, credit from the curve used for discounting. this change effects valuations of all derivatives from the simplestspreads soared to unprecedented heights. swap to the most complex exotic. It also affects theBasis spreads between three-month Libor difference in valuations between collateralised andand six-month Libor, for example, went uncollateralised transactions.from fractions of a basis point (where they FAS 133had been quoted for decades) to double the Financial accounting standards Board’s Fas 133digits in a matter of months. These changes first requires that all derivatives be recognised on thehave severe accounting implications. balance sheet as assets or liabilities and that they all are valued at Fair market Value (FmV). most firmsValuation Implications use the Fair Value Hedge method as the accountingthe changes in the market environment have far treatment for derivatives associated with liabilities.reaching implications for the valuation of all derivativecontracts. classical no-arbitrage principles that Fair Value Hedges need to be subject to effectivenessformed the basis of all derivatives pricing no longer tests and the change in market practice and valuationhold. For instance, before the credit crunch, one methodologies need to be reflected in thosecould safely combine a 3x6 forward rate agreement tests. For a derivative not designated as a hedgingtogether with a 6x9 FRa to create a 3x9 rate (with an instrument, the gain or loss is recognised in earningsalmost negligible adjustment). this is no longer the in the period of change. consequently, neglecting tocase as the basis between rates widened considerably update valuation methodologies to market standardreflecting that the 3x9 FRa contains different credit may create significant potential earnings volatility.risk than the combined 3x6 and 6x9 FRas. FAS 157the market now recognises that libor has a credit Fas 157 defines fair value, establishes a framework forcomponent. Valuations based on a single curve have measuring fair value in generally accepted accountingbeen replaced with a multi-curve approach which principles (GaaP), and expands disclosures about fairseparates the curve used for cash flow generation value measurements.06 | www.quantifisolutions.com
  7. 7. Changes to Current Practice accounting rules are very similar to Fas 133 andthe changes to current practice resulting from the Fas 157.application of this statement relate to the definitionof fair value, the methods used to measure fair similarly to the FasB regulations the fair value methodvalue, and the expanded disclosures about fair required that, changes in valuations between the datevalue measurements. on which a hedge was established and the valuation date need to be computed. these valuations includethe definition of fair value retains the exchange a credit component requiring different curves for cashprice notion established in earlier definitions of fair flow generation and valuation.value. this statement clarifies that the exchangeprice is the price in an orderly transaction betweenmarket participants to sell the asset or transfer the “The changes in the marketliability in the market in which the reporting entitywould transact for the asset or liability the principal environment have far reachingor most advantageous market. implications for the valuationthe statement emphasises that fair value is a of all derivative contracts.”market-based measurement, not an entity-specificmeasurement. therefore, a fair value measurement Conclusionshould be determined based on the assumptions the new multi-curve interest rate curve paradigmthat market participants would use in pricing the has a significant impact on the value of all derivativeasset or liability. transactions. In order to comply with FasB 133/157, Isa 39, and IFRs 9 compliance this new valuationIAS 39, IFRS 9 methodology needs to be implemented and accountingthe International accounting standards Board (IasB) valuations have to reflect this new market standard.issued Ias 39 in 2004 and issued its replacement IFRs9 in 2009; this statement is mandatory starting January01 2013, even early adaption is permitted. these www.quantifisolutions.com | 07
  8. 8. New Website Quantifi Releases QXQuantifi recently launched its newly designed corporate Version 10.0 satisfies OTC market demandwebsite to reflect the growth and breadth of its for counterparty risk management andsolutions and services. The new website captures the regulatory compliance. It includes significantscope of Quantifi by showcasing our award-winning enhancements to product coverage,solutions, high-performance technology, asset coverage, functionality and usability including:and leadership team in a simple and usable format. • Fourth generation counterparty riskThe website incorporates Quantifi’s new corporate brand management with market leadingidentity which has been designed to convey a strong performance based on the fastest, most accurate Monte Carlo engine availableimpression of our core principles – Lead, Innovate, Deliver, • Significantly expanded asset coverageand Serve. This new brand has also been consistently including Hybrid productsapplied to our corporate logo, product naming conventions • SABR rate volatility modelling withand collateral. managed-cost for complex rate derivatives • Dual-curve/collateral-adjusted interest rate risk management • Enhanced flow trading support including Eurodollar Packs and Bundles • Simplified operations with improved time- cohesive corporate action processing • Continued usability enhancements including a rebranded user interface • Security improvements including support for SQL Server Windows Authentication Recent Awards Quantifi Risk - Best Risk Analytics Initiativewww.quantifisolutions.comWhitepaper Abou EvoluThe Au t Quantifi CVA - Credit Technology DrA tion of thors Jon Gre Coun s View terparty Cr Dr Jon gor y Gregory Salom edit Ri on is a consu Intr Broth the frameodu ers (now ltant speci later beingworkction Citigroup). Altho Global ugh part for the pricin alizing From in the area of sk About The Authors the expeHead oftheofrecenAnaly growthmanagement of coun , he worked rty risk. He starte have been the rapid g and t evolving crisis has 1997 to 2005 counterpa Evolution of Counterparty CreditBarclthe credittened atives rty risk for BNP Paribas, d his career the credi rience while over the past Risk area of Credit Innovation Award credit brought of for risk, recen tics at heigh deriv terpa DrA Gregory Jon crossandWHthe investment ngdecadappro althe focus businterpaFrom 2005 toincom ly on at Hedging t crisis. ManaIT -pollinatio tly was co banks culminatin at ayse. Banks based addre in couness. initial s View textderivativesRisk Inn2001, he, Elookiautho some ofachedcomp ,London. Herty credit risk2008e divisideveland Capit the fixed oping PAPE in the ssed the field of geme ideas g with prob Dr Jon Gregory is a consultant specializing in the Consof THE risk risk.nt, short his career book it from acoun lem from of pricin and r of the at has publis theorhe R area counterparty g techn He started olidat EVOLUT manageme best listed the repeal Credlex deriv pract for terparty , y was tradit many and pract hed Salomon Brothers (now Citigroup). From 1997 to 2005,CRE and for BNP Paribas, initially developing GlassThe atives persp he ion worked ION OF ices. In Kulp of ology risk ectiveional financ ice Mark largest DIT the neces nt and insur thepartic Wrigit: -Stea the to the paper the Introduction pricing and management meth will financial RISK fixedto probance. and ular, inves gall in 1999 Com issue s ing framework for the of ets, Cou the counterparty risk fornter sity income division COUNTasses lem of ht Book plete Guid s. in relation in As gies and instit - s e towas the industry adva derivatives released onutionAN Cred up capita odolo be part free tment , there Although the the rapid growth of the heightened focus, counterparty credit risk theory was ERPART quant Award for later being part ofrecent crisis has brought credit nce, signe business. From 2005yto 2008, heand practice andINSIDE sing banks Pricin to stand. d copymana Friday, drove it Risk: l as Y starte most substantial thed g, traditional R’S crediEvolution of have been evolving over the at Barclays Capital addressed the problem from Decea manyfinancinginNew Coun Global Head of Credit Analytics past decade. Banks based in London. Hegemepublishedmber spapersVIE t risk terparty durin nt respo serie of innov has The ifying to signif and risk g area of credit risk, recently looking at approached ng.from manageme RiskMinds As 11 2009 ation Thes nsibil the the experience while the investment bankssome ofhedgicomplexacounterparty risk issues in ities.th industry s.Challeng e incre W becam counterparty apply traditional icant David the it The term derivatives perspective. relation to by in Gen e asingly risk. the credit crisis. In 2001, he, was co author ofthecounterpa Glass-Steagall in nt isGuide towas substantial Wiley & Sons. for Global concentrat for book Credit: The Complete Kell of e innov WHITE PAPER culminating with therepeal y 1999, there Pricing, plea evolving eva ations rty risk. CVA (cred Fina involv ncial Hedging and Risk Management, short listed forKellyparticular, investment banksfor the most significant se visit Wile For a chan ed both ed within traders David In cross-pollination of ideas and best practices.the Kulp Wright Book Award it value to apply traditional from Substantial startedadjus passive risk trader, of, Direc organ y & Sons ce to textderivatives pricing technology toandainsurance. assessing of quantifying counterparty risk. t) in the field of risk management the problemization. tor and respo tmen quant win THE EVOLUTION OF COUNTERPARTY technCredit Prodincreasingly concentrated within ification to one exhibition an conse quant As Consolidation and the necessity to Portfup capital hascredit risk became uct ty of free olio Optim, and various exten nsus as nsibility is being has beco me transferre well-know of active   ologist sions New Challenge for Developm g pricin CREDITfinancial institutions drove aBankRisk: The emergedThese to QuanGlobal Financial Counterparty establishin today izatio the largest RISK - AN INSIDER’SsVIEW Credit series of innovations. that innovations involved and mana n to the both d from n and manageme respo l g the tend todesk, & Sons. For At globa 11th essen Markets, will be released on Friday, Decemberbanks2009 by Wileyrespo tially a chance to win tifi, tifi. reserent, Quan an ging all credit repre nt methodologies and management responsibilities. CVA busin distri nsible repla Citigroup, mark bring the nsible be ve and officers sents a price for have advance, signed copy during RiskMinds in Geneva pleaseess. Prior along active portf he was mode counterpa   with other front conve visit Wiley & Sons ces buted for exhibition et s almo to CVA -offic rged stCounterparty Credit Risk stand. traces from financial e pricinto the th the evolu olio theorthe ls have20 years of withi to ly mana Counterparty risk management is evolving the passive risk quantification to one of active management senior credi ging rty risk evolution institutiong models and conse tionary the credi reser been impleexperienc y and t trade ment n an and hedging. The term CVA (credit considerab value adjustment) has becomeswell-knownnsus model   of coun such as and represents atimeline t risk inves with r on ed, e as risk price asset mana whils by size deriv active the Glob David Kelly risk. Substantial responsibility isinfluence. for counterparty le terparty credit mana geme t being transferred from credi officers to CVA small and sophi atives mana a general al gers are nt tools posit geme traders Reserve and managing all the counterpartybasedwithincloser er and more ty of pricing t risk risk an for the stication ions and nt. David Kelly, Director of Credit Product Development, Quantifi, brings almost 20 years of experience as to the begin regional banks where model on actua global derivatives organization. As various extensions to the reserve and market models have been implemented, a lgeneral Reserve At Citigroup, he was the senior credit trader on the Global rienc expe ning , toget a trader, quant, and technologist to Quantifi. mode consensus has emerged that essentially replaces portfolio theory and reserves with active management. trans for actively are es withi stages. This tradin her g Portfolio Optimization desk, responsible action, ls managing the credit risk in derivatives positions and essen n banks charg paper Banks today tend to be distributed along thethe premium Co-autho evolutionary tially timeline by size and sophistication where that have ing. establishing the CVA business. Prior to th amou trading desk insurance   had global banks have converged to the consensus nt is red by smaller and more regional banks, together accou model whilst pays policies nting Expl managementJon a for the global derivatives trading responsible for front-office pricing models and riskores based tools prem against with other financial institutions such as asset managers are closerGregory into stages. This paper for prac   such as apprisk mitig on the credithe ium to beginning losse roaches tical experiences anda pool from s due had   the overa twor within banks charging. traces the evolution of counterparty credit riskllbased ants suchimpleme thiness David that haveto counterpa rating An s based insid level on actual as have ) asses er’sof portfolio netting ntation issu coun y (Qu t which considerable influence.   are comp influ convergeand of the Kell credi rty defau ence t view smen diversificat collat es and rty antifi) terpa losse lts. For   a chose rised of two d this the from the d ion. eral (marg how the s are reimb of prob and each   n confi comp mar ability majo Origi in) future ursed Reserve model eventual inves dence level, onents ket of defau ban nally, reser agreements r expo . The very tment also refer the expected lt (PD) rathe have ks that ve mode and highe sure, Reserve models are essentially different. policies against losses red to counterparty defaults.rFor each ls used histo r level aspec bankingRequest a copy: insurance due to loss or than mark partners as econ CVA rical (usua ts transaction, the trading desk pays a premium into a pool from which credit losses are reimbursed. The et credit Banks www.q all used omic and the lly typica and David uan reserve capital. Trad Co-authored bybased on the creditworthiness of the counterparty and the future exposure, potential unexspreads. Prem premium amount is Jon Gregorylly conve tifis Kelly (Quantifi) credit mode itiona risk as olut rted expo ions ls but l pre-m pected iums accounting forpractical implementationand collateral (margin) agreements and higher levelunde Explores risk mitigants such as netting issues and how if it were sures .com the aspects erger loss withi a loan. to so- rlying banks n approaches  level converged such as the overallhaveof portfolio diversification. Originally, reserve models used historical (usually In the methodolo and their   loan 2010 early gies were ratings insider’s view from the major of default (PD)have days, loan An based) assessment of the probability banks that rather than market equivalent   credit spreads. Premiums 1   equiv s and   areinfluenced this market comprised of two components the expected loss or CVA and the potentialalents then price unexpected loss within 2   were d the a chosen confidence level, also referred to as economic capital. Traditional pre-merger bankscritical to and their increment   eventual investment banking partners all used reserve models but the underlying methodologies were simplify a alenquire@quantifisolutions.com poten tially very different. www.quantifisolutions.com so- Banks typically converted exposures to loan equivalents and then priced the incremental credit risk as if it were a loan. In the early days, loan equivalents were critical to simplify a potentially 1   2      ABOUT QUANTIFIQuantifi is a leading provider of analytics, trading and risk management software for the Global Capital Markets. Our suiteof integrated pre and post-trade solutions allow market participants to better value, trade and risk manage their exposuresand respond more effectively to changing market conditions.Founded in 2002, Quantifi has over 120 top-tier clients including five of the six largest global banks, two of the three largestasset managers, leading hedge funds, insurance companies, pension funds and other financial institutions across 15 countries.Renowned for our client focus, depth of experience and commitment to innovation, Quantifi is consistently first-to-marketwith intuitive, award-winning solutions.enquire@quantifisolutions.com | www.quantifisolutions.comEurope: +44 (0) 20 7397 8788 • North America: +1 (212) 784 6815 • Asia Pacific: +61 (02) 9221 0133© Quantifi Inc. all rights reserved. Quantifi, Quantifi Risk, Quantifi Xl, Quantifi counterparty Risk, Quantifi cVa are trademarks of Quantifi Inc.