Numerix, a specialist in cross-asset analytics for derivatives valuations and risk management, has announced new functionality for cheapest-to-deliver (CTD) curve construction and the analysis of collateral.
The group added that the solution is based on Numerix CrossAsset analytics architecture and can be leveraged by both buy- and sell-side institutions to analyse CTD collateral at any point in time over the lifecycle of a trade, helping to increase cost-saving opportunities, minimise funding costs and determine how trade valuations vary under different collateral choices.
Numerix commented that post-crisis the collateral management and valuation process became increasingly complicated. The market observed a divergence in rates and shift from London Interbank Offered Rate (Libor) to overnight indexed swap (OIS) for collateral discounting, affecting both fundamental curve stripping as well as basic risk-neutral valuation.
The embedded optionality of credit support annex (CSA) terms remained complex, especially for multi-currency CSAs which allow for collateral posting of different types of securities in different currencies, with each currency potentially requiring a separate discounting curve.
“Regulatory reform has pushed risk management and its impact on the valuation process to the forefront driving the convergence of front and middle office operations,” said Steven O’Hanlon, chief executive officer (CEO) and president of Numerix. “Given the rise in the importance of funding throughout the life of a transaction the implications for collateral management and hedging has never been greater.
“Now chief risk officers (CROs) and senior managers must look very closely at the cost and profitability of all trading operations, taking into account not only collateral choices but funding cost, market and counterparty credit risk.”
However, a London summit on the industry’s introduction of the technology cautions that testing and acceptance are still at an early stage and firms should proceed with caution.
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