SimCorp, a provider of investment management software and services for the global financial services industry, has released a whitepaper entitled ‘Credit Risk Exposure: Leveraging Dodd-Frank as a Catalyst for Change’. The paper examines credit risk exposures and how buy-side firms can leverage Dodd-Frank to assess their readiness for credit risk reforms and implement comprehensive risk management.
In the 16 titles of Dodd-Frank, the term credit exposure is mentioned more than 30 times. Dodd-Frank outlines that credit exposures need to be measured across all transactions and holdings to limit the ripple effects of company defaults. In a recent SimCorp poll of nearly 100 executives from 50 buy-side firms across North America, 30% of respondents admitted that they presently cannot estimate the P/L of a potential default of the companies they are exposed to in a timely fashion.
“While Dodd-Frank is a good start for credit reforms, definitions are limited and overlook the potential default of the issuers of the derivatives’ underlying assets, which can have a significant impact on a firm’s exposure,” said Else Braathen, author of the whitepaper and head of the risk management domain at SimCorp.
The whitepaper outlines eight qualities of an effective credit default risk solution:
- Consolidate position-keeping across all holdings for an accurate view of exposure.
- Identify exposures for all issuer and counterparty risks.
- Show underlying issuer risks derived from the underlying assets of derivatives and funds.
- Include collateral to view mitigated counterparty risk exposures.
- Aggregate all of the above to gain a complete view of exposure in case of a default.
- Set limits on the company exposures – depending on the firm’s credit risk assessment.
- Group related companies and measure domino default effects.
- Do all of the above in a timely fashion – i.e. during trading hours.
“While OTC [over-the-counter] derivatives have come under fire for being risky products, they can also provide great returns if managed with a 360 degree view into both exposure and performance,” said David Kubersky, managing director for SimCorp North America. “Many of our clients who chose to leverage technology to facilitate transparency in the trade lifecycle were among those least impacted by the 2008 financial crisis.”
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