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PwC_Market Risk Group

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PwC_Market Risk Group

  1. 1. Measuring value, managing risk PwC Ireland Market Risk Group www.pwc.ie/banking/market-risk.jhtml
  2. 2. Contents Market Risk Group 04 Product overview 06 Our approach 11 Our people 13 Our firm 14 Our network 15 Appendix 16 Contacts 18
  3. 3. In the Market Risk Group PwC Dublin has put together a team of specialists, networked globally, with an unrivalled breadth and depth of experience in the valuation and accounting for financial and derivative instruments. The Group operates within the Banking & Capital Markets practice where it acts as the in-house centre of excellence for the valuation, accounting and risk measurement of derivative and financial instruments. It provides support services, on a consultancy basis, to audit engagement teams and direct to clients. The Market Risk Group has worked with many clients who have been finding it difficult to keep abreast of the ever-changing world of financial instruments. • Increased product complexity - advances in financial engineering, and technological environment has resulted in the derivatives market becoming more complex; • Accounting - prevalence of fair value in GAAP (UK, US, IFRS) has increased the level of risk in the area of financial instrument valuations; Market Risk Group 4 Market Risk Group Financial Instruments Accounting expertise Valuation expertise Various industry and risk management expertise
  4. 4. • Risk management - the increasing volume and complexity of derivative transactions combined with the increasing volatility in today’s financial markets are causing financial institutions to re-examine and enforce their risk management processes, particularly market risk management and ALM; • Regulation - valuation, risk management and risk control processes are under increasing scrutiny from regulators. Our experience comes from the day to day interaction in valuing thousands of instruments each year, ranging from vanilla to exotic financial and derivative products. Our expertise comes from our specialised and multidisciplinary team which has established an extensive knowledge base, complementing their pre-eminent academic background, providing rigorous but pragmatic solutions to challenging problems. Recent project experience includes: • Valuation assurance for an international fund administrator; • Building an interest rate swap model for a large Irish energy company; • Valuation and risk measurement assurance for a large Irish bank internal audit function; • VaR model validation (UCITS IV) for an international asset manager; • Financial instrument accounting support for large an Irish agri-business entity; • Treasury policy document for an Irish plc; • Valuation, accounting and IFRS 7 disclosure review for a large Irish manufacturer; • Financial instruments component of IFRS transition for an Irish semi-state entity; • Advice on funding and interest rate hedging strategy for a large Irish communications company; and • Valuation assurance for various audit teams. Our services are used by: • Accountants/CFO’s/FD’s • Corporate treasurers • Risk managers • Internal audit functions • Asset Management administrators and portfolio managers • Professional services entities • State bodies and departments 5
  5. 5. Product overview Client benefits: • Addressing gaps in coverage (and potential mispricing) arising from increased product complexity and resource constraints • Coping with additional scrutiny over valuation from a risk management and control perspective (audit, regulation, independence, documentation) • Benchmarking to best practice • Timely reporting and flexible formats 6
  6. 6. Financial Instruments: Quantitative Assurance & Modelling For several years the Market Risk Group has been delivering a high quality service to many of PwC’s clients that are faced with challenges within the financial instruments arena. There is broadly two main streams to our services; quantitative assurance and modelling and accounting for financial instruments. Valuation of derivative and financial instruments The Market Risk Group performs valuations to assist audit engagement teams (PwC Ireland and other offices within our Network) and clients to establish the reasonableness of fair value measurements and disclosures. The extent of our assistance is flexible to your requirements but we typically perform: i. Review of valuations methodologies, market input data and assumptions; ii. Independently determining valuations based on market-accepted methodologies, model analytics (external and internally generated) and independently sourced market data. PwC have access to a number of market data sources including Bloomberg, Reuters, FT Interactive Data. The table in the Appendix provides a sample (not exhaustive) of our product / methodology capabilities. Model risk assessment, process assurance and re-engineering Model risk is one of the most sensitive issues at present, we provide modelling assurance and independent modelling support in the area of financial instrument valuation. We also provide quantitative assurance and independent modelling services supporting accounting standards requirements. This mainly encompasses requirements under IFRS and US GAAP (hedge accounting, impairment tests, fair value etc). We also provide process assurance and process re-engineering in the area of financial instrument valuation. This process includes coverage of market data management (enterprise wide market data coherence, data reliability, control framework and observability analysis for illiquid market data), model selection, validation and implementation and reserve management (reserve policy and methodologies for illiquidity and model risk). Market and operational risk management The Market Risk Group also provide specialist market and operational risk management assessment services in areas such as: review of market risk control processes (including VaR); IPV process review; review of market risk mitigation (hedging) practices. 7
  7. 7. Financial Instruments: Quantitative Assurance & Modelling Our processes are highly developed with the capability to value large portfolios of instruments. Each assignment is accompanied by a written report including market data, model methodologies, analysis and exceptions noted. Detailed spreadsheets with transaction-level results and identification of outliers can also be provided. Work is performed using a combination of external and internal model analytics, tailored to your circumstances. As assignments can be time sensitive these valuations can be completed, reviewed and discussed within short timeframes. The reporting format is flexible, depending on client requirements Model output includes risk statistics (delta, vega) which can be particularly useful as; i. an aid to understanding the financial statement sensitivity to changes in market variables, and ii. source data for IFRS7/FRS29 disclosure purposes. 8 Market Risk Group Valuation | Accounting | Risk Results Trade Instrument Instrument Trade FV FV DV01 FV FV DV01 Within Ref Type Description Maturity Ccy Notional Client PwC PwC Diff Diff % Shift Tolerance D12349 Ccy Swap Pay EUR Fix 4.5% Rec USD 3M 06-Aug-13 EUR 1,400,000 (28,945) (30,002) 2,157 1,057 0.08% 0.49 Yes D12362 Ccy Swap Pay EUR Fix 5% Rec USD 3M 06-Nov-14 EUR 3,900,000 (80,633) (83,577) 5,859 2,945 0.08% 0.50 Yes D12375 Ccy Swap Pay GBP Fix 5.5% Rec USD 3M 06-Feb-16 GBP 6,400,000 (132,320) (137,152) 9,470 4,832 0.08% 0.51 Yes D12353 CDS - Index Buy CDX.NA.IG.9 5Y 0%-3% 20-Dec-15 EUR 3,684,000 250,636 252,084 (1,070) (1,448) -0.04% 1.35 Yes D12366 CDS - Index Buy CDX.NA.IG.9 5Y 3%-6% 20-Mar-17 GBP 6,184,000 420,720 423,151 (1,751) (2,431) -0.04% 1.39 Yes D12352 CDS - Single Asset Buy BNP Snr 2% 04-May-12 USD 3,684,000 250,636 252,084 (1,070) (1,448) -0.04% 1.35 Yes D12365 CDS - Single Asset Buy BKIR Snr 5% 04-Aug-13 USD 6,184,000 420,720 423,151 (1,751) (2,431) -0.04% 1.39 Yes D12378 CDS - Single Asset Sell BARC Snr 2% 04-Nov-14 USD 8,684,000 590,804 594,218 (2,422) (3,413) -0.04% 1.41 Yes D12357 Eq Opt - Basket G7 Index 75% Call 15-Jul-14 EUR 7,500,000 (287,962) (284,084) (1,447) (3,878) -0.05% 2.68 Yes D12356 Eq Opt - Index S&P ASX 200 Put 4505.5 15-Nov-11 USD 10,000,000 1,309,658 1,292,552 15,138 17,106 0.17% 1.13 Yes D12369 Eq Opt - Index FTSE UKX Call 5165.5 15-Feb-13 USD 12,500,000 1,637,073 1,615,690 18,450 21,383 0.17% 1.16 Yes D12355 Eq Opt - Single Asset Nissan Motor Co Call 746.5 15-Nov-11 USD 10,000,000 1,309,658 1,292,552 15,138 17,106 0.17% 1.13 Yes D12368 Eq Opt - Single Asset BHP Billiton Put 1800 15-Feb-13 USD 12,500,000 1,637,073 1,615,690 18,450 21,383 0.17% 1.16 Yes D12354 Equity Swap Long Ford Motor Co v 3M+1% 05-Apr-12 USD 4,217,000 135,697 140,621 (4,575) (4,924) -0.12% 1.08 Yes D12350 FX Forward Buy GBP Sell EUR 18-Nov-13 GBP 2,100,000 (142,852) (140,225) (17,513) (2,627) -0.13% 0.15 Yes D12363 FX Forward Buy EUR Sell USD 18-Feb-15 EUR 4,600,000 (312,914) (307,160) (37,403) (5,754) -0.13% 0.15 Yes D12351 FX Option - Barrier Buy USD Sell GBP KO 1.85 06-Sep-19 USD 3,500,000 (456,123) (452,312) (12,294) (3,811) -0.11% 0.31 Yes D12348 Inflation Swap Pay 5% Rec 1.5%*Index 07-Jun-14 GBP 5,000,000 120,565 125,645 (2,063) (5,080) -0.10% 2.46 Yes D12346 IR Option Long Cap 4% v 3M 04-Mar-16 USD 5,000,000 4,452,098 4,332,154 29,267 119,944 2.40% 4.10 Yes D12359 IR Option Short Cap 3.5% v 3M 04-Jun-17 EUR 7,500,000 6,678,147 6,498,231 42,803 179,916 2.40% 4.20 Yes D12372 IR Option Long Floor 2% v 3M 04-Sep-18 EUR 10,000,000 8,904,196 8,664,308 56,215 239,888 2.40% 4.27 Yes D12345 IR Swap Pay Fix 4.5% Rec 3M+0.4% 04-Feb-15 USD 5,000,000 4,500,850 4,325,008 91,863 175,842 3.52% 1.91 Yes D12358 IR Swap Pay Fix 5.5% Rec 3M+0.00% 04-May-16 USD 7,500,000 6,751,275 6,487,512 134,349 263,763 3.52% 1.96 Yes D12371 IR Swap Pay 3M+0.4% Rec Fix 3.5% 04-Aug-17 USD 10,000,000 9,001,700 8,650,016 176,445 351,684 3.52% 1.99 Yes D12347 IR Swaption Eu Long Pay 4% v 6M 10yr 05-Apr-15 EUR 10,000,000 9,852,478 9,700,552 32,011 151,926 1.52% 4.75 Yes D12360 IR Swaption Bm Long Pay 3.5% v 6M 10yr 05-Jul-16 EUR 12,500,000 12,315,598 12,125,690 39,014 189,908 1.52% 4.87 Yes D12373 IR Swaption Eu Short Rec 4.5% v 6M 10yr 05-Oct-17 EUR 15,000,000 14,778,717 14,550,828 46,114 227,889 1.52% 4.94 Yes Note: Assumed data for illustrative purposes
  8. 8. Financial Instruments: Accounting & Disclosure Despite an already full agenda today’s CFO’s and treasurers need to keep abreast of the ever-changing world of financial reporting for derivative and financial instruments and consider financial instrument reporting challenges, such as: • How do changes to your business and outlook impact hedge accounting and the income statement? • Is there sufficient flexibility in your hedge accounting to allow for changes to your funding/debt profile as market opportunities arise? • Have we identified, valued and accounted for all embedded derivatives? • Are the financial instrument disclosure notes in our financial statements adequate and accurate? • Would your accounting team benefit from updates and training on recent and expected changes to IFRS and Irish GAAP? PwC recognises these challenges are part of the reality of business life today. The Market Risk Group has significant experience, both as business advisors and market practitioners, advising audit and non-audit clients on the complexities of financial instrument accounting under Irish/UK GAAP and IFRS. We have been helping our clients navigate through these challenges and deliver tangible value in terms of practical solutions, measurable cash savings and improvements to processes and controls. These services have typically included: Hedge structuring and designation • Proactive, pre-trade accounting and structuring advice; • Review of all aspects of hedge accounting. Advising on and formulating policy documents, valuation and testing methodologies and disclosure checks; • Producing templates re documentation, effectiveness testing and account postings (incl. control checks and balances); • Optimisation of the hedge accounting controls framework; • Managing and reporting financial risks and hedge performance. Portfolio health checks • Embedded derivative identification & valuation • Best practice (efficiency) benchmarking • Updates/presentations on latest developments (IFRS amendments, US GAAP convergence) With our unrivalled breadth and depth of experience in both the valuation and accounting for financial instruments the Market Risk Group provide a comprehensive solution for all your measurement, accounting and disclosure requirements. 9 Client benefits: • Align accounting treatment with economic risk position • Valuation aspect also covered, particularly useful where contracts are not valued by counterparty, e.g. hypothetical derivatives, embedded derivatives, hedged item in a Fair Value Hedge and ‘commercial’ contracts that are required to be valued for accounting purposes.
  9. 9. Why does it matter • Proliferation of ad-hoc and inefficient solutions results in procedures that are time consuming and prone to error. • Compliance is one of the top three points of focus of regulator review. • Impact can be market moving if an entity gets it wrong. • The specialist skills are not always available in-house. Financial Instruments: Hedge Accounting Outsourcing Any treasurer or finance officer with responsibility for compliance with IAS 39 will appreciate that it can be a time consuming, complex exercise. The PwC Market Risk Team can provide you with a low cost outsourced compliance solution. What we are hearing Benefits of our outsourced solution Unable to devote in-house specialist to the area Access to extensive knowledge base and full time specialists Time consuming exercise Internal resources freed up for value-adding work Area of significant focus More structured response to queries Lack of transparency around externally supplied valuations Ability to sense check bank valuations Disclosure requirements of IFRS 7 are difficult to source Sensitivities provided for IFRS 7 purposes Integration with the commercial risk management of the business Risk sensitivities can be used to quantify portfolio exposures (hedged and unhedged) to changes in the market The deliverables We can deliver (as you require): • Pre-trade advice on hedging strategies; • Draft hedge documentation for your approval; 10 • Valuation of hedging instrument, hedged item / hypothetical derivative; • Risk sensitivities for IFRS 7 disclosures; and • Periodic prospective and retrospective effectiveness testing and calculation of actual ineffectiveness.
  10. 10. Our approach Underpinning our methodology is a solid and tested project management approach. We aim to set up, plan, schedule and control project activities to achieve delivery, cost and time objectives and benefits for a given scope of work, whilst using resources efficiently and effectively. A core part of our work will be to analyse the key issues early on in the process and to continually re-visit them as our assignment progresses to ensure that your specific interests are addressed in full. Our approach is designed to continually support you throughout the process, providing services based on: • A client focused assistance ‘menu’, where you determine the quantity, timing and reporting format; • An experienced team who have operated in a wide range of assignments in the financial sector, both in Ireland and internationally; • Following a structured process whilst retaining flexibility to adapt to changing requirements where appropriate; • Providing a comprehensive report on each element as required, therefore ensuring the project is achieving its objectives; and • Communicating with all stakeholders on a regular basis, identifying issues as they arise together with recommended approaches for resolution or mitigation. 11
  11. 11. Market Data Client Data Calculations Outputs Report Delivery Trade specification & data setup Market data input & verification Hedge identification & designation IFRS compliant documentation Valuation engine Effectiveness testing Prices/ valuations Accounting & disclosure Client reporting Client reporting Underpinning our methodology is a solid and tested project management approach. Valuation&RiskAccounting&Disclosure Financial instrument valuations 12
  12. 12. Our people The Group has in excess of 40 years combined experience in the provision of assurance and advisory services with respect to valuation, risk and accounting services aspects of financial and derivative instruments. The Group acts as an in-house valuation service for derivative and financial instruments across our portfolio of Banking, Insurance, Asset Management and non financial services clients within PwC Ireland and for other PwC offices within our Network. Our technical competence commences with our staff. We invest significantly in staff training at all levels. This programme includes on-going training of our teams in the latest developments in relevant technical disciplines and market practices. In addition, key members of the core team have been specialising in derivative valuation and similar skills for a numerous years. Experience • Partner, senior managers and managers within Banking & Capital Markets; • Over 40 years combined financial services experience; • Valuation and accounting specialists; • Irish representatives at PwC European Treasury/Leaders forum and the PwC Global Corporate Treasury Technical Committee. Qualifications • Range of primary degrees including Business Studies and Mathematics; • Range of post graduate degrees including Accounting, Computer Science, Investment & Treasury; • Professional accounting qualifications (ACA); • Membership of Irish Association of Corporate Treasurers. 13
  13. 13. 14 Our firm PwC is the largest professional services firm in Ireland with over 1,900 employees. Our Firm has the largest financial services practice in Ireland with over 600 professionals specialising in the provision of services to clients in the financial services industry. This depth of knowledge and experience gives us an unrivalled level of expertise to call upon to support you. Within the Irish business community, PwC has an outstanding reputation for independence, quality, excellence and integrity. This reputation is reflected by the fact that we advise 71% of the top 200 Irish companies. The firm has significant resources. Our Irish financial services practice is made up of our banking, insurance and asset management sectors and employs people in audit, advisory and tax and legal services. With over 600 specialist FS staff the size of our practice allows us to invest in people, technology and thought leadership at a level that only the market leader can sustain. Details accurate as at Nov 2012 Over 2,000 major global and Irish based organisations We are auditors to: 32% of companies listed on the Irish Stock Exchange 35% of the Irish Times Top 100 companies
  14. 14. PwC has created a European Network of Market Risk and Asset & Liability Management experts which encompass the practice country leaders and seeks to share experiences and provide technical support when necessary. This network gives to all of our experts an invaluable and extensive insight into Market Risk and ALM leading practices; and illustrates the “connected thinking” way of delivering client service. Beyond this internal networking, our expertise is enhanced by maintaining a strong network of academic and business connections which allows us to keep our experts at the forefront of market practice and academic evolutions. Our network PwC is consistently at the forefront of industry and financial reporting developments 15
  15. 15. Appendix Quantitative Assurance & Modelling While the Market Risk Group offers full coverage of vanilla instruments, we also provide significant coverage of more complex and exotic products. The table below is not intended to be an exhaustive product list, but does provide a good representation of our model capabilities: 16
  16. 16. Asset Class Instrument Type Model Methods Simple Complex Foreign Exchange Forward / swap Vanilla (call/put) Barrier Binary Variance / Vol swap Average option Structured products Fader Quanto Basket DCF / Forward rate Garman-Kohlhagen Black-Scholes Vanna-Volga Local volatility Equity Markets Forward / swap Vanilla (call/put) Barrier Binary Lookback Variance / Volatility swap Asian Quanto Basket Quanto basket Best / Worst of Rainbows & Outperformance Cliquets & Accumulators Mountain range DCF / Forward rate Black-Scholes Binomial Monte Carlo Local volatility Stochastic Volatility Interest Rates Swap / ccy swap Inverse floaters In-arrears swaps Cap / floor Swaption Bermudan swaptions Callable / Cancellable Barrier Binary CMS swaps Range accrual Snowball TARN DCF / Forward rate Black Black-Karasinski Hull Hull-White Libor market model Inflation Markets Swaps Bonds Cap / floor DCF / Forward rate Hull-White Local volatility Credit Markets Cash deals (Fix / FRN) Single name CDS Index CDS Convertibles Index tranche (standard) Index tranche (bespoke) CDS options Synthetic CDO DCF / Forward rate Hull-White Default intensity Tsiveriotis-Fernandes Gaussian copula Commodity Markets Forward / swap Vanilla (call/put) Barrier Binary Asian Quanto Basket Quanto basket DCF / Forward rate Black-Scholes Binomial Monte Carlo Local volatility 17
  17. 17. Contacts PwC offers a full range of advisory services to assist you in identifying and managing the complex risks associated with the development, deployment and maintenance of complex models used for risk management, valuation and financial reporting purposes. For more information please contact: Ronan Doyle +353 1 792 6559 ronan.doyle@ie.pwc.com John Healy +353 1 792 8828 john.healy@ie.pwc.com Ciaran Corbally +353 1 792 8259 ciaran.corbally@ie.pwc.com John O’Donnell +353 1 792 7048 john.a.odonnell@ie.pwc.com 18
  18. 18. Disclaimer This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
  19. 19. © 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/ structure for further details 02938 www.pwc.ie

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