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  Issue 11 | Archive May 2012

RMI holds Workshop on Credit Risk and CVA

As an education and training aspect of its non-profit Credit Research Initiative (CRI), RMI conducted a two-day workshop on “Credit Risk and CVA in Practice” from 9 to 10 April. Recently, counterparty credit risk (CCR) has been drawing a significant level of attention from regulators, financial institutions, and academics after the global financial crisis. Many have realized that no counterparty is default-free, even in the case where the counterparty is a sovereign government or a multinational economic union. This highlights the importance of CCR management. However, it is a complex challenge to measure, hedge and monitor CCR for the financial institutions whose counterparty portfolios consists of thousands of trades driven by hundreds of market factors. It is also a great challenge for the regulators to effectively monitor the macro-level counterparty risk in the financial system, especially risk concentration.

With Basel III to start taking effect from 1 January 2013 in quite a number of jurisdictions, CCR management is becoming a much more pressing issue for the local and global financial industry. In this regard, the timely workshop taught by United Overseas Bank’s Executive Director and the Head of the Credit & Country Risk Management Division, Mr. Frankie Phua and University of Manchester’s Professor of Finance Ser-Huang Poon, provided compact informative sessions from expert practitioners supplemented by practical hands-on exercises. The workshop discussed topics including how to model and analyze credit risk exposure, as well as making adjustment in pricing and risk capital calculation.

Mr. Phua started the course by spending a morning to introduce the fundamental concepts on CCR and sharing his practices and the implication of the new regulations on the local financial industry. Professor Poon took over to cover in greater detail the quantitative aspects of exposure modelling, decomposition and allocation, netting and collateral, CVA pricing and hedging, adjusting derivative prices and risk capital calculation for CCR, as well as the latest developments in CCR. Numerous practical exercises with real life examples were given to help participants better understand the concepts and gain first-hand quantitative experience. During the hands-on exercises in RMI’s computer lab, participants gained access to RMI’s CRI system with daily updated default probability forecasts for over 28,000 listed firms in 30 economies in Asia, North America and Europe. Participants were also able to take away all worked examples and additional exercises and models implemented using Excel functions and macros.

The course’s two trainers have brought in practical and academic insights of the subject matter respectively with their individual expertise. At UOB, Mr. Phua is responsible for credit policy, CCR management, internal credit rating models (PD, LGD and EAD), economic capital modelling, portfolio concentration management, country risk management and credit stress testing. Besides teaching at Manchester Business School, Prof. Poon is also a visiting professor at the National University of Singapore and was recently appointed as a distinguished visiting professor at the University of Technology, Sydney. She is also a Board Member of the Numerical Algorithms Group. Prof. Poon has contributed to doctoral training programming in the U.K. and Europe over a long period. In 2002, she set up the first ESRC funded U.K.-wide Advanced Doctoral Training Programme in Finance and set up Master of Science in Quantitative Finance and Financial Engineering and Master of Science in Mathematical Finance at Manchester Business School in collaboration with the School of Mathematics in 2004. She managed the European framework 6 doctoral training program at Manchester. In 2008, she successfully led a European consortium of 19 university and industry partners on a 3.7 million euro bid for research training in the theme of Risk Management and Risk Reporting. An expert in volatility, derivatives and credit risk, liquidity and quantitative aspects of risk management, she has been working extensively with European financial industry partners on quantitative CCR management.

The course received very positive feedback from the participants. They stated that the course is a good and interactive introduction to CCR and the relevant topics, and has met their learning objectives. Based on the excellent response, RMI plans to roll out the course again  from 9 to 10 July and enhance its content. For more details, please visit http://rmi.nus.edu.sg/training/CVAinPractice.php.

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Published quarterly by Risk Management Institute, NUS
Editor: Ivy Wang (rmiwy@nus.edu.sg)