Accurately measuring and managing a portfolio’s counterparty credit risk (CCR) is very challenging, requiring that you accurately capture the stochastic nature of counterparty exposures, as well as the dependency between exposures and counterparty defaults. From a regulatory perspective, the Basel II Accord allows banks to use internal models to compute CCR capital requirements, based on the concepts of expected positive exposure (EPE), and the alpha multiplier. In addition, financial institutions must value their derivatives portfolios incorporating the possibility of losses due to counterparty default. The credit valuation adjustment (CVA) is the market value of this counterparty credit risk.
R² Credit Capital for CCR and CVA provides a powerful solution for computing and allocating CVA, as well as for measuring CCR economic capital. In particular, it provides comprehensive stress testing capabilities, as well as a unique framework to effectively model wrong-way risk.
The Basel II Framework requires that banks using a VaR model to compute specific risk in the trading book also develop a methodology for measuring an incremental risk charge (IRC). IRC captures credit default and migration risks that are incremental to the risks captured by the market VaR calculation. The Basel committee expects banks to develop their own internal IRC models and the fall-back option is very punitive. The new rules come into force from the end of 2010. R2 Capital Credit provides a comprehensive solution that integrates an advanced valuation and credit portfolio risk engine, which effectively covers the entire trading book credit activities, with an interactive dashboard, providing comprehensive reporting and stress testing capabilities. In addition to custom-made reports for risk management and regulators, it allows users to drill down and understand the impact of correlations, concentration risk and liquidity.
R² Credit Capital enables clearing houses and brokers to measure and manage their global settlement risk exposure on a real-time basis using advanced Monte-Carlo methods. The solution includes the ability to measure risk contributions across a number of dynamic dimensions including trading counterparties, asset types, and settlement periods. Risk contributions, which reflect the true economic contribution of each clearing member, are then used to measure the amount of collateral that needs to be posted by each member. A powerful real-time reporting interface facilitates the creation of comprehensive risk reports, trend profiles, and exception reports to draw management`s attention to areas of concerns.
In order to manage their financial risks, financial institutions have typically implemented various separate market, credit and operational risk measurement tools, through various vendors and internal developments. R² Credit Capital for Enterprise Economic Capital Risk Aggregation provides an enterprise risk management framework for viewing and managing financial risk in an integrated way across the firm. By leveraging existing systems and infrastructure and adding advanced EC analytics, the solution delivers powerful capital allocation and decision support tools for senior management, based on a single, integrated view of risks and reward across the entire firm.