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© 2016 Thomson Reuters 1
Rates Analytics proposition – David Rickard
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RATESANALYTICSPROPOSITION- AGENDA
• Introductiono Backgroundo TargetclientGroupso Technology
• SWPRdemo:moreFlexibility,extendedassetcoverage
• SWPRdemo:Pricingframework®ulation:CreditRiskMitigation(CVA)
• SWPRDemo:VanillaSwaps,CrossCurrencySwapsincludingNegativeRates
• SWPRDemo:SwaptionsandCaps/Collars.
• PortfolioAnalytics:Manageandvalueaportfolioofderivativeinstruments(FX&InterestRates)
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RATESANALYTICSPROPOSITION- INTRODUCTION
• Background– FinancialCrisis>>RegulatoryChangesforOTC– IFRS9&13,BASELIII,EMIR,MifiD,Dodd-Frank– NeedforamorecomplexRatesDerivativesPricingframework– InturnledtoChangesinMarketPractice– mainlyduetoCounterpartyCreditRiskissues(CCR)
• MarketIntelligence– ThomsonReutersdevelopedourapplications– Morethan500ClientVisitsandMeetingsGlobally– Feedbackfrommultipleclientsandclienttypes– >>TotallynewInfrastructureandplatform- server-basedpricer andportfolioplusadvanced
analytics• AdapttoRegulationchange
– ProvideanalyticalapplicationsthatalignwithAASB9&13– CVAandDVAalreadyinplace,withFVAtobereleasedduringH22017– IncrementalCVAatatradeandportfolio leveltobereleasedQ12017– XVAmaybedevelopedwithvisibilitytobanksonly.
• OurAim– Apowerfuldesktop Cross-Assetpricingandvaluationsystem– Afullycompliant,openandextendablesystem– Support forAllProducts,ResponsivetoClientNeeds
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MARKET-LEADINGANALYTICS– CVAANDCOLLATERAL
– CounterpartyCreditRisk• Howtoprotectagainstlossesintheeventofadefault?• SwapsdisplayBi-LateralCreditRisk– Appliestomeaswellasmycounterparty• Solution>>ExchangingCollateraland/orCVA
– CVA– CreditValuationAdjustment• Howlikelyisacounterpartytodefault?• ExposureSimulation– whichcounterpartyisinreceiptofthenetcashflow?• >>DefaultProbability
– SingleNameCDS,IndexCDS,CreditCurve,IssuerCurve,SpreadoverFundingRate,WACC
• >>Positive&NegativeExposure– SimulationMethod– Canapplytoanyinstrument– WheredoestheExposuretoDefaultRisklie?– WhichofthetwocounterpartiesisprojectedtobeinreceiptofthenetCashFlowat
eachpointduringthelifecycleoftheswap(portfolio)?
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RATESANALYTICSPROPOSITION- CVA
CreditcurveestimationisakeyinputintotheCVACalculation.Dependingonthecounterpartythefollowing decisiontreeisused:
IstherealiquidCDS?
Isthereanotherliquid benchmark
(e.g.bond)?
Isthereasuitablesingle-name
proxy?
NO
NO
YESUseCDSQuote
UseCreditCurves (witha
spread)
Useproxywithaspread(Risk
free)
YES
YES
Use the Search tool to find CDS from TR,Markit, GFIS .. Etc..“Basel III capital rules […] defines CVA withrespect to Credit Spread”
EnteraCurrencytousetheTRCreditCurvesTheseareavailablefordifferentRating,Rating/Sectors(e.g.AUDBBBNonFinancial)
Enter a Spread on top of a FundingRate (e.g. Libor + x bp)
IntheNEWSWPRApp
“IFRS13usestheconceptofexitprice,whichimpliestheuseofmarketimpliedinformation”
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RATESANALYTICSPROPOSITION- CVA
ResultAnadjustmenttothevalueoftheswap:aninsurancepolicyintheeventofdefaultMoreoftentheCVAadjustmentisexpressedbyadjustingtheFixedRateoftheswap
Unilateral and Bilateral CVA• Unilateral CVA / DVA is for either theCounterparty and / or the Self without reference tothe default probability of the other.• Bilateral CVA / DVA calculates the CVA for eitherthe Counterparty or the Self but computes whichwill likely default first and if either or both willdefault before the maturity date of the transaction.=> The net of the two is additive
CVAresultsfromMainTab
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RATESANALYTICSPROPOSITION- SWAPPRICER- SWPR
NewSWPR- moreFlexibility,extendedassetcoverageSupportssamecurrencyorasecondcurrencycashcollateral
SelecttopriceOTCorCollateralised
VanillaIRS,Cross-CurrencySwaps– includingnegativerates,Swaptions– vanillaandBermudan,Caps,Floors,Collars– vanillaanddigital,BasisSwaps,In-Arrears,CMS,Non-Deliverable,OIS
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RATESANALYTICSPROPOSITION- SWAPPRICER CCSMATRIX
• Comparefunding opportunities inupto8currenciessimultaneouslyagainstyourfunctionalcurrency• Enteryourfunding rateeitherasafixedrateoraspreadoverafunding rate– e.g.3MEuribor+120bps• UsetheHeat-maptoidentify bestandworstfunding ratesforyourselectedcurrenciesandtenors
• Chartsshowfunding levelsforeachcurrencyandtenor• Yourfundingrateisclearlymarkedonthechartforeasycomparison• Changefocusofchartsbyselectingcurrenciesandtenorsintheheat-map
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RATESANALYTICSPROPOSITION- SWAPPRICER– MONTECARLOANALYSIS
SwapPricer – CVAexposureresultstabCVAtabtodisplayexposure(Potential&Expected)results
Viewtheexposureresultsasachartorseethedollaramountinatable
(unilateralandbilateral)
ResultstableallowstheusertoseethebreakdownofCVAandDVAonaunilateralandbilateralbasis.SpreadscanbeaddedtoadjusttheresultsintheCreditCurvesection(self&counterparty)
• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile
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RATESANALYTICSPROPOSITION- SWAPTION EUR2Y– 3Y- SWPR
Swaption inSwapPricer – 2yr– 3yrChoosespecificdates,volatilitymethodology,Strikepriceand
CashExerciseAdjusttheunderlyingswap,amortisation
orindividuallegdetails
ObservetheCVAforstraightoramortising facevalues,PotentialExposure,Payoffdiagramwith‘Greeks’forindividualtradesor
multilegstrategies,VolatilityCubesandSkew.
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RATESANALYTICSPROPOSITION- INTERESTRATEOPTIONS– VANILLACOLLAR
InterestRateCaps,FloorsandCollarsVanillaorBermudanstyleoptionprofiles– includingcoveringnegativeinterestrates
• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile
UsetheVolatilitysurfacetoidentifythemostsuitable
outcome.
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RATESANALYTICSPROPOSITION- INCREMETALCVAINSWAPPRICER
Atthetradecalculationleveltheusercanidentifytheirincremental
CVA charges
TheusercanthenchoosethecounterpartythatresultsinthelowestincrementalCVA impact
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PORTFOLIO-BASEDPRICINGANDVALUATION– PORTFOLIOANALYTICS
• Tradevs PortfolioLevel– DesktopsupportedONLYTradeLevel– HoweveritisessentialtomanageCVAandCollateralatPortfolioLevel– KeyReasons:
» PortfolioEffectswillimpactpricingofadditionaltrades» Riskreportingmustbedoneattheportfoliolevelforregulatorycompliance» CVAisnotadditive– thereisnetting
– IncrementalCVA(willbedeliveredearly2017)andPortfolioReporting• ImpactofMultipleTradesonPortfolioValuation
– Saywehave200tradeswithabanktradedoverthelast10years– Differentages,maturities,prices,interestrateenvironment– SomeareITM,someOTM– WecanseeimpactonCVAofFixedRateandPayReceive
• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile
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• Add or update deals directly from Swap Pricer trade ticket orimport them from excel• Create, share and manage portfolios of interest rate derivatives,cash bonds, bond futures, repo,Organize positions by portfolio, underlying instrument, asset class,currency, counterparties or rating• Manage your counterparties in the system and monitor yourcounterparty exposure• Calculate the portfolio P&L and Mark-to-Market using real-timedata or conduct valuations for an historical date• Supports Multi-currency exposures as well as allowing thefunctional or base currency to be specified
RATESANALYTICSPROPOSITION- PORTFOLIOANALYTICS
VariousCreditRiskreportsareavailable:• CalculateKeyRateExposurefortimebuckets• CalculatePortfolio CashFlows• VaR
• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile