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The term is generally used in this context in relation to "counterparty risk", [2] which is the risk of monetary loss a firm may be exposed to if the counterparty to an over-the-counter securities trade encounters difficulty meeting its obligations under the terms of the transaction.
Reference data is a catch all term used in the finance industry to describe counterparty and security identifiers used when making a trade. As opposed to market data the reference data is used to complete financial transactions and settle those transactions. The financial service industry and regulatory agencies have pursued a policy of ...
A Credit valuation adjustment (CVA), [a] in financial mathematics, is an "adjustment" to a derivative's price, as charged by a bank to a counterparty to compensate it for taking on the credit risk of that counterparty during the life of the transaction. "CVA" can refer more generally to several related concepts, as delineated aside.
PFE is the "Potential Future Exposure" to the counterparty: per asset class, trade-"add-ons" are aggregated to "hedging sets", with positions allowed to offset based on specified correlation assumptions, thereby reducing net exposure; these are in turn aggregated to counterparty "netting sets"; this aggregated amount is then offset by the ...
Offsetting counterparty risk is not always possible, e.g. because of temporary liquidity issues or longer-term systemic reasons. [16] Further, counterparty risk increases due to positively correlated risk factors; accounting for this correlation between portfolio risk factors and counterparty default in risk management methodology is not trivial.
In the modern banking industry collateral is mostly used in over the counter (OTC) trades. However, collateral management has evolved rapidly in the last 15–20 years with increasing use of new technologies, competitive pressures in the institutional finance industry, and heightened counterparty risk from the wide use of derivatives ...
It maintains a substantial position in swaps for any of the major swap categories. A swap bank can be an international commercial bank, an investment bank, a merchant bank, or an independent operator. A swap bank serves as either a swap broker or swap dealer. As a broker, the swap bank matches counterparties but does not assume any risk of the ...
In general, EAD is seen as an estimation of the extent to which a bank may be exposed to a counterparty in the event of, and at the time of, that counterparty’s default. EAD is equal to the current amount outstanding in case of fixed exposures such as term loans.