Index

•  
• AAD see adjoint algorithmic differentiation
• absolute returns 231–233, 240
• Additional Termination Events (ATE) 137–140
• add-on factors 259–260, 359–362, 365
• adjoint algorithmic differentiation (AAD) 643
• advanced CVA capital risk charge 340, 343, 348–350, 358, 367, 574
• ageing 410
• aggregation 302–305, 429–430
• AIG see American International Group
• AIP see auction incentive pools
• allocation
  • credit value adjustment 506–510
  • exposure quantification 414–419
  • funding value adjustment 555–558
• ALM see asset-liability management
• Amdahl's law 491–492
• American International Group (AIG) 157, 271–272
• American Monte Carlo methods 422, 428, 600, 643
• amortisation 572, 600
• AngloGold Ashanti Ltd 182, 272
• arbitrage pricing 104–105, 423
• ASF see available stable funding
• Asian crisis 514
• asset correlation 342, 438
• asset-liability management (ALM) 396–399, 561, 639
• asset swaps spreads 319
• asymmetric funding 551–563
• asymmetric margin agreements 289
• asymmetry, ColVA and discounting 470–473
• ATE see Additional Termination Events
• auction incentive pools (AIP) 265–267
• auctions 199–201, 220, 263
• available stable funding (ASF) 398, 406

•  
• backloading 83, 241, 606, 618, 647
• backtesting 38, 229, 254, 350, 370–372, 428, 644
• BA-CVA 340, 343–358, 367, 393, 572, 635
• Bank of England stress tests 73
• Bankhaus Herstatt 44
• Basel Committee on Banking Supervision (BCBS) 97, 329, 505, 599, 194, 273, 420–424, 427–428, 440–441, 444–445, 459, 288, 137, 157, 166–171, 181, 194, 213–214, 218–219, 222, 236, 243–244, 273, 64–77, 81–83, 339–345, 349–353, 357–364, 368–373, 384–386, 635
• Basel II framework 57, 64–65, 84, 176, 357
• Basel III framework 485, 505, 316–318, 442, 176, 63–65, 69–71, 84, 349, 369–374, 384, 97, 609, 613, 616
• base value 86–88, 100, 124–129, 285, 465–466, 480–483, 619–620, 635–638
• BCBS see Basel Committee on Banking Supervision
• BCBS-IOSCO 34, 81–83, 166–171, 181, 194, 213–214, 219, 242–243, 273, 599
• BCVA see bilateral credit value adjustment
• Bear Stearns 26, 29, 32–33
• Bermudan swaptions 422, 433–434, 643
• beta hedging 630–631
• bifurcation 132–135, 210, 270
• bilateral clearing 41–47, 189, 204–205
• bilateral credit value adjustment (BCVA) 396, 498–503, 508, 511–512, 541
• bilaterally-traded derivatives 6–16, 111–122, 129–136, 189
• bilateral margins
  • basics of 142–145, 150–151
  • clearing impacts and risks 255, 271–279
  • collateral discounting 467, 480
  • exposure quantification 445–446, 460–461
  • initial margins 168–170, 213–220, 229, 242–254
  • margin value adjustment 591–593, 599–600, 606–607
  • over-the-counter derivatives 33–34
  • regulation 63–65, 78, 80–84
  • regulatory methodology 340, 361, 364–365
  • requirements 166–173
• bilateral markets
  • clearing 255–256, 268
  • margining 165–166, 213–220, 229, 244–245, 255–256, 268
  • regulation 339–340, 357–366, 385–387
• bilateral netting 111–112, 114–115, 122, 129, 132–136
• Bolsa de Valores, Mercadorias & Futuros de Sao Paulo (BM&FBOVESPA) (1999) 186, 258–259
• BP Deepwater Horizon oil spill 272
• break clauses 137–140
• buffers, capital ratios 66–67
• Buffett, Warren 19

•  
• Caisse de Liquidation (1974) 256–257
• capital
  • bank stress tests 68, 73
  • central counterparties 64, 72, 78–84, 384–387
  • charges 64–65, 68–70, 87, 92, 316, 336, 339–358, 367, 370–387, 569–573, 635–637
  • conservation buffers 66–67, 392
  • costs 61–62, 389–407
  • counterparty risk 61–62, 68–72, 569–577, 586
  • credit risk 67–72, 341–344, 358, 568–577, 586–589
  • credit value adjustment 64–65, 68–70, 73, 565–589
  • exemption 70, 569–570, 577, 586
  • floors 68, 71–72, 366, 569–571
  • large exposure frameworks 72
  • leverage ratio 68, 70–71
  • prudent valuation 73
  • ratios 65–67, 102–104, 565
  • regulation 64–74, 81–84
  • regulatory methodologies 339–387
  • relief 139, 323, 328, 343–345, 348–352, 355–356, 379–384
  • requirements 64–84, 384–387
  • risk types 67–72
  • xVA desks 609–623, 629–647
• capital value adjustment (KVA) 565–590
• cash flow differential 288–289, 293–297
• cash flows
  • exposure quantification 442
  • frequency 293–294
  • future value and exposure 311–314
  • FVA and discounting 530–539
  • netting 111–121
• CBOT see Chicago Board of Trade
• CCAR see Comprehensive Capital Analysis and Review
• CCDS see contingent CDS
• CCP see central counterparties
• CDO see collateralised debt obligations
• CDPC see credit derivative product companies
• CDS see credit default swaps
• CEM see current exposure method
• central clearing 185–211
  • advantages/disadvantages 209–211
  • auctions 199–201
  • CCP risk management 197–205
  • central counterparties 186–211
  • compression 192–194
  • default funds 194–208
  • impacts 209–211, 255–261, 277–279
  • initial margins 205–208, 216, 219, 243
  • loss waterfall 202–204
  • mandatory clearing 210–211
  • mechanics 189–197
  • multilateral offset 192–194
  • over-the-counter derivatives 29–36, 186–201, 208–210
  • regulation 77–81, 339–340, 359–360, 366, 373, 384–387
  • relationships 195–197
  • risks 197–205, 255–261, 277–279, 526–527
  • wrong-way risk 526–527
  • xVA desks 610–613, 645–647
• CET1 see Common Equity Tier 1
• cheapest-to-deliver optionality 473–478
• Chicago Board of Trade (CBOT) 186, 258–259
• Chicago Mercantile Exchange (CME) 32, 191–192, 221–225, 240, 258–259, 264, 274
• Citigroup 28–29, 127–128, 179, 531
• clearing mandate 32–33, 63, 79–84, 210–211, 395, 480, 591, 647
• clearing rings 114–115, 186
• client clearing 189, 386–387
• close-out
  • CVA and DVA 502–503, 505
  • FVA 536–542
  • netting 121–122, 129–131, 135, 138, 302, 309, 357, 360
  • over-the-counter derivatives 111–136
  • xVA definitions 100
• CLS see continuous linked settlement
• CME see Chicago Mercantile Exchange
• co-dependency 39, 287, 371–373, 409, 431, 461
• coherent risk 37, 228, 236
• collateral 137–183
  • agreements 45–46
  • counterparty risk 54, 61–62
  • discounting 466–483
  • exposure quantification 413–414, 421, 430–431, 437–447, 456–461
  • funding value adjustment 529–562
  • overnight indexed spread discounting 467–468
  • xVA definitions 85–100, 107
  • xVA desks 609–614, 617–621, 625–628, 633–647
  • see also margining
• collateral calls 200
• collateralisation
  • counterparty risk 41–62
  • derivatives 11–19
  • future value and exposure 306–308
  • perfect 466–467
  • regulatory methodologies 354–357, 360–366, 372–378, 385
  • wrong-way risk in CVA 525–526
  • xVA desks 642
• collateral value adjustments (ColVA)
  • counterparty risk 57
  • definitions 86–87, 90–93, 469–470, 482–483
  • discounting 469–480
  • exposure calculations 430
  • funding 405
  • margin 146
  • xVA desks 614, 636
• COMEX see The Commodity Exchange Inc.
• commodity
  • exposure quantification 437
  • swaps 515
• Commodity Clearing House (1983) 257

• The Commodity Exchange Inc. (COMEX) 257

• Common Equity Tier 1 (CET1) 65–68, 72–73, 392
• complete clearing 186–187
• Comprehensive Capital Analysis and Review (CCAR) 73
• compression 115–120, 192–194
• concentration risk 261
• confidence levels 214, 243–244
• contingent CDS (CCDS) 53, 326, 346, 349
• contingent FVA 561–563
• contingent MVA 603–604
• continuous linked settlement (CLS) service 44, 83, 113–114
• contractual clauses/terms/value 46, 100
• correlation
  • derivative risk modelling 39
  • exposure quantification 417–419, 437–439
  • xVA desks 621
• costs
  • capital 61–62, 389–407
  • funding 283, 308–314, 395–403, 531–563, 591–608
  • margining 216, 276–277
  • xVA definitions 88–90
• countercyclical capital buffers 66–67, 392
• counterparty risk 1, 41–62
• coupon blending 177
• CPSS-IOSCO principles 208, 218, 222, 234
• credit
  • curves 319–338
  • derivatives 17–18, 300–302, 524–525
  • indices 325–326, 336
  • mitigation 59–60
  • pricing 101, 486–487
  • quality 218–220, 256, 275–278, 310, 324–326
  • ratings 155–157, 331–332
  • xVA desks 610–646
• credit default swaps (CDS)
  • counterparty risk 46, 52–53, 60–61
  • credit curve mapping 324–326
  • credit spreads 315–338
  • credit value adjustment 486, 495–496, 499, 505–506, 515, 522–526, 587–589
  • exposure quantification 427, 441
  • funding value adjustment 540, 547–550
  • future value and exposure 300–302
  • netting and close-out 117
• credit derivative product companies (CDPC) 26–28, 34–35
• credit exposure
  • counterparty risk 58–59
  • credit value adjustment 283–285, 308–311, 410–413, 420–421, 428–430, 440–442, 485–486
  • future value 283–292, 309–310
  • quantification 409–411, 424–427, 430, 437–439, 442–443, 456
• credit limits/credit lines 48–50
• credit risk 1, 116, 486, 587–589, 610, 616, 628, 631
  • capital 67–72, 341–344, 358, 568–577, 586–589
  • credit value adjustment 485–489, 492–507, 513–517, 526–527
  • derivative risks 21–22
  • exposure quantification 410, 428, 430, 446
  • premiums 400
  • regulatory methodologies 339–387
  • warehousing 116, 486, 587–589, 610, 616, 628, 631
  • xVA desks 609–611, 616–618, 622–624, 628–633, 638, 642, 646
• credit spread 59–60, 315–338, 425, 492–494
• credit support annex (CSA)
  • types of 153–154
• credit value adjustment (CVA) 485–527
  • allocation 506–510
  • capital 64–65, 68–70, 73, 565–589
  • capital charge 64–65, 68–70, 87, 92, 316, 336, 343–358, 367, 370–383, 569–573, 635–637
  • capital exemption 70, 569–570, 577, 586
  • definitions 482–483
• cross-currency swaps 298–299, 412, 422, 426–427, 436–439, 452–458
• cross-gamma 515, 609, 615, 619–628, 632–633
• cross-margining 220–222, 241
• cross product netting 129
• cross-section methodology 332, 334–336
• CSA see credit support annex
• currency netting 113–114
• current exposure method (CEM) 340–341, 357–366, 375–378, 386, 410–411, 446, 570–571
• CVA see credit value adjustment
• CVA challenger model 318
• CVA desks 52–54, 138, 349, 356, 382, 588, 609, 635

•  
• debt value adjustment (DVA)
  • capital value adjustment 567
  • counterparty risk 52, 55–57, 343, 351
  • credit exposure 284, 286, 309
  • credit spreads 315
  • credit value adjustment 485, 498–506, 508–512, 514
  • exposure quantification 410, 460
  • funding 396–398, 529–530, 534–536, 539–551
  • use of 503–505
  • xVA definitions 86–87, 90–92, 97–99
  • xVA desks 611, 618–624, 628–629, 637
• Deepwater Horizon oil spill 272
• default funds
  • central clearing 194–208, 257–270, 278–279
  • central counterparties 257–270, 278–279, 384–386
  • counterparty risk 340, 366, 384–387
• default probability
  • counterparty risk 59–60, 341–343, 348–349, 373
  • credit spreads 315–338
  • credit value adjustment 316–319, 485–489, 492–501, 507, 513–517, 587
• delta or delta-gamma approximations 247–248
• dependency
  • derivative risk modelling 39
  • exposure quantification 417–419
  • initial margins 215–223, 230, 235, 247
• derivative product companies (DPC) 25–28, 34–35
• derivative risks 5–39
• derivatives 5–39
  • central counterparties 6, 8–13, 29–36
  • collateralisation 11–19
  • counterparty risk 6–39
  • exchange-traded 6–16, 19, 25, 29–31
  • global financial crisis 3, 17–19, 25–36
  • Lehman Brothers bankruptcy 19–20
  • market participants 11–16
  • market size 12–14
  • users 12–16
  • see also over-the-counter derivatives
• direct clearing 186, 195
• Dodd-Frank Wall Street Reform and Consumer Protection Act 64, 73, 79, 82, 151, 219, 344
• DPC see derivative product companies
• Drexel Burnham Lambert 31, 123
• dual curve pricing 433, 468
• DVA see debt value adjustment

•  
• EAD see exposure at default
• EBA see European Banking Authority
• ECP see expected capital profile
• EE see expected exposure
• effective expected positive exposure (EEPE) 367–370, 644
• EFV see expected future value
• EIM see expected initial margin profile
• EMIR see European Market Infrastructure Regulation
• end users 12–16, 602
• ENE see expected negative exposure
• enhanced supplementary leverage ratio 71
• Enron Australia 123
• entry pricing 105–106
• EONIA (Euro Overnight Index Average) 146, 474
• EPE see expected positive exposure
• equity
  • exposure quantification 437
• ES see expected shortfall
• EU see European Union
• Eurex 191–192, 240
• Euro Interbank Offered Rate (EURIBOR) 401
• Euro Overnight Index Average (EONIA) 146, 474
• European Banking Authority (EBA) 69–70, 73, 150, 318–319, 323, 328, 331, 336, 355, 370, 637, 646–647
• European Central Bank (ECB) 318
• European Market Infrastructure Regulation (EMIR) 64, 83, 117, 151
• European swaptions 301, 422, 433–434, 597, 619
• European Union (EU) exemptions 355–356
• exchange-traded derivatives 6–16, 19, 25, 29–31
• exit prices 95–96, 105–106
• expected capital profile (ECP) 409–410, 567–585
• expected exposure (EE) see expected positive exposure
• expected future value (EFV)
  • collateralisation 466, 469–473, 476
  • exposure quantification 413, 448–454
  • funding value adjustment 535–538, 541–543, 554–558, 561
  • future value and exposure 288–291, 296–298, 302–304
• expected initial margin profile (EIM) 409–410, 594–601
• expected negative exposure (ENE)
  • capital value adjustment 567, 582
  • ColVA and discounting 471
  • CVA and DVA 498–503, 511, 519
  • exposure quantification 409–418, 426, 448–457
  • funding, margin and capital costs 396
  • funding value adjustment 529, 536, 540–543, 552–562
  • future value and exposure 289–291, 296–298, 302–306
  • xVA desks 623–624
• expected positive exposure (EPE)
  • capital value adjustment 567, 573–576, 582
  • credit value adjustment 487–495, 498–503, 507–521
  • exposure quantification 409–418, 426, 434, 439–442, 448–462
  • funding value adjustment 529, 536, 540–543, 552, 555–559
  • future value and exposure 289–298, 301–307
  • regulatory methodology 349
  • xVA desks 623–624
• expected shortfall (ES) 227–230, 236–240, 247, 599–600
• exposure
  • allocation 414–419
  • calculations 339–346, 355–381, 385–386
  • drivers of 292–302
  • margin impacts 163–165
  • quantification 409–462
• exposure at default (EAD) 70, 339–346, 355–362, 366–369, 372–381, 385–386

•  
• fair value 95–96, 98, 337, 530
• Fannie Mae 27, 322
• FAS see Financial Accounting Standards
• FASB see Financial Accounting Standards Board
• FBA see funding benefit adjustment
• FCA see funding cost adjustment
• Federal Reserve Bank 157, 271
• Fed Funds (USA) 146, 401, 405, 474
• Financial Accounting Standards Board (FASB) 95–98, 503–505, 611
• Financial Accounting Standards (FAS) 52, 95–99, 498, 548–549

• ‘financial weapons of mass destruction’ 18–19

• fire drills 199–200
• foreign exchange (FX)
  • counterparty risks 43–47
  • credit value adjustment 515
  • currency netting and CLS 113–115
  • CVA 515–516, 522–526
  • derivatives 5, 21, 32
  • quantifying exposure 418–419, 423–427, 430–431, 435–439, 457, 466–467
• Freddie Mac 27, 322
• FRTB see Fundamental Review of the Trading Book
• FTP see funds transfer pricing
• Fundamental Review of the Trading Book (FRTB) 341, 351–352, 377–378, 424, 569–570, 589, 635–636
• funding
  • costs 283, 308–314, 395–403, 531–563, 591–608
  • curves 287, 395, 400, 404–406, 538–539
  • liquidity risk and margining 181–183
  • spreads 403–406
• funding benefit adjustment (FBA) 308–314, 396–398, 410, 531–563
• funding cost adjustment (FCA) 396–398, 410, 531–563
• funding value adjustment (FVA) 389–390, 394–399, 406, 529–563
  • debate 546–548
  • discounting 530–551
• funds transfer pricing (FTP) 396, 399, 404–405, 548, 621
• future value, exposure 283–314, 409, 413, 429, 448
• FVA see funding value adjustment
• FX see foreign exchange

•  
• gamma, hedging 625–627
• gap risk 460–461
• generic credit curve mapping 330–338
• generic proxies 328
• global financial crisis (GFC) 3
• globally-systemically-important banks (G-SIB) 6, 66–67, 72, 392, 568, 586
• globally-systemically-important financial institutions (G-SIFI) 176
• Greeks 241, 247, 326, 414, 420–422, 432, 621–627, 631, 642–643
• G-SIB see globally-systemically-important banks
• G-SIFI see globally-systemically-important financial institutions
• guarantees 343

•  
• haircuts
  • central clearing 203, 257, 265–270
  • future value and exposure 311
  • margining 146–152, 157–161, 168–173, 178–180, 218–220, 243–245
  • regulatory methodologies 360, 363
• hedging
  • counterparty risk 46, 52–53
  • credit curve mapping 323, 326, 328
  • CVA and DVA 505
• Herstatt risk 43–44, 113
• high-quality liquid assets (HQLA) 74–75, 390, 395, 399, 406, 559–562, 592, 604, 640
• historical simulation 229–242
• Hong Kong Futures Exchange (HKFE) 257–258
• HQLA see high-quality liquid assets

•  
• IBOR see Interbank Offered Rates
• IFRS see International Financial Reporting Standards 13
• IHS Markit CDS Enhanced Sector Curves 337–338
• IHS Markit's Totem service 99–100, 180, 396
• IMM see internal model method
• incremental CVA 506–509
• incremental exposure 414–417
• index CDS 623
• inflation 437
• initial margins
  • bilateral margins 168–170, 213–220, 229, 242–254
  • clearing 205–208, 255–279
  • collateral and settlement 144–157, 161–183
  • counterparty risk 54
  • credit value adjustment 512–513
  • margin value adjustment 591–608
  • methodologies 213–254
  • schedule-based 242–254
  • simple approaches 222–223, 242–245
  • simulation 229–242
  • Standard Portfolio Analysis of Risk (SPAN) 223–229, 239
  • value-at-risk 227–240, 245–249
• Interbank Offered Rates (IBOR) 395, 399–403, 465, 468
• interest rate swaps (IRS)
  • capital value adjustment 570–571, 582–585
  • credit value adjustment 488–494, 501, 508–512, 518–519, 521, 525–526
  • exposure quantification 411–412, 434, 438, 448–456
  • future value and exposure 293–300, 307
  • initial margins 230
  • margin value adjustment 596–598, 607
• internal model method (IMM)
  • capital value adjustment 570–574, 586
  • exposure quantification 424–429, 432, 446–447, 461
  • funding, margining and capital costs 393
  • regulatory methodology 340–341, 346–350, 357–362, 367–379
• internal rate of return (IRR) 566–567, 585
• internal ratings-based approach (IRB) 341–343, 367
• International Financial Reporting Standards (IFRS) 13 95–99, 498–499, 503, 609, 611–613, 616
• International Organization for Securities Commission (IOSCO) 137–140
  • BCBS-IOSCO 34, 81–83, 166–171, 181, 194, 213–214, 219, 242–243, 273, 599
  • CPSS-IOSCO principles 208, 218, 222, 234
• International Swaps and Derivatives Association (ISDA)
  • documentation 16–17, 123–129, 137–147, 151–154, 158–178, 243–245, 249–254, 285
  • margining 137–147, 151–154, 158–178, 243–245, 249–254, 446–447, 596–597
  • Master Agreement 16–17, 123–129, 137–147, 151–154, 158–178
  • SIMM 243–245, 249–254, 446–447, 596–597
• IOSCO see International Organization for Securities Commission
• IRB see internal ratings-based approach
• IRR see internal rate of return
• IRS see interest rate swaps
• ISDA see International Swaps and Derivatives Association
• iTraxx 324–327, 337, 338

•  
• JP Morgan Chase & Co 29

•  
• KfW Bankengruppe 113
• Korea Exchange (KRX) 202
• Kuala Lumpur Commodity Clearing House 257
• KVA see capital value adjustment

•  
• large homogeneous pool (LHP) 342
• LCR see liquidity coverage ratio
• legal risk 22, 179, 220, 261
• legal segregation 149
• Lehman Brothers 3, 6, 17–32, 113–114, 123–129, 148–149, 200–201, 216–218, 236–240, 505
• leverage ratio
  • capital 68, 70–71
  • capital value adjustment 565, 568–578, 586
  • funding, margining and capital costs 390–394
  • regulatory methodologies 339–340, 366, 372–373, 386–387
  • xVA definitions 102–104
  • xVA desks 612–613, 618
• LGD see loss given default
• LHP see large homogeneous pool
• LIBOR see London Interbank Offered Rate
• liquidity coverage ratio (LCR) 63, 74–76, 87
• London Interbank Offered Rate (LIBOR) 399–402, 433, 465, 468–469, 473, 479–481, 530, 538–539
• look-back period 230–240, 245, 250, 595, 598
• lookup grids/ tables 617
• loss given default (LGD)
  • counterparty risk 60–61
  • credit curve mapping 326–327
  • credit spreads 315–338
  • credit value adjustment 485–489, 494–501, 507–514, 524
  • default probabilities 315–338
  • funding value adjustment 540
  • regulatory methodology 341–343, 348–351
  • xVA desks 610–611, 629, 642
• loss mutualisation 30, 35, 46, 79–80, 195, 205–210, 255, 262, 278
• loss waterfall 202–204, 262–264

•  
• macro-hedging 199, 201
• mandatory clearing 32–33, 63, 79–84, 210–211, 395, 480, 591, 647
• mapping, credit curves 319–338
• margin agreements 45–46
• marginal credit value adjustment 509–510
• marginal expected positive exposure 455–456
• marginal exposure 414–417
• margin call frequency 154
• margining
  • basics 141–152
  • bilateral markets 165–166
  • capital costs 389–407
  • central clearing 144–145, 157–158, 165–168, 189–208, 255–261, 277–279, 591, 600–606
  • ColVA and discounting 470–480
  • counterparty risk 41–48, 54–62, 138–143, 148–155, 165–183, 607
  • credit support annex 152–154, 157–166, 172, 181–183
  • credit value adjustment 276–278, 393–398, 494–496, 506–515, 524–527, 591–595, 599–603
  • discounting 465–483
  • disputes 151
  • exposure quantification 409–410, 413–421, 428–431, 437–462, 466
  • funding 180–183, 257–270, 276–279, 389–407, 529–562
  • future value and exposure 283–314
  • haircuts 146–152, 157–161, 169–173, 178–180
  • impacts of 173–183, 255–279, 305–308, 312–314
  • legal risk 179
  • liquidity 176–183
  • operational risk 179
  • perfect collateralisation 466–467
  • reconciliations 151
  • regulation 77–84, 340–344, 351–352, 357–367
  • risk of 255–279
  • segregation 147–150, 179
  • settlement 137–183
  • terms of 152–166
  • types of 157–161
  • valuation agents 151
• margin period of risk (MPoR)
  • capital regulation 64–65
  • central clearing 199–201
  • counterparty risk 42–45
  • exposure quantification 420, 431, 439–445, 456–460, 466
  • future value and exposure 306–309
  • initial margins 213–218, 222–223, 228, 243–246, 254
• margin value adjustment (MVA) 591–608
  • computational challenges 599–606
  • costs 276–278
  • definitions 482–483
  • formula 594–599
  • funding and capital costs 389–390, 395, 406
  • xVA definitions 86–87, 90–93, 98–101
• market risk
  • capital 67–69
  • capital value adjustment 568–569, 572–573, 589
  • counterparty risk 46, 57
  • credit value adjustment 487–495, 498–503, 507–521
  • derivative risks 21
• Master Agreement 16–17, 123–129, 137–147, 151–154, 158–178
• MBIA 27–28, 504
• MBS see mortgage-backed securities
• Merrill Lynch 25, 28
• MF Global 179, 272
• minimum transfer amounts (MTA) 155–157, 162, 364, 444, 458
• mitigation, counterparty risk 45–46, 59–60
• MM see Modigliani–Miller
• model risk 260
• Modigliani–Miller (MM) theorem 389–390, 393–394, 546, 565, 607–608
• moneyness 297–298, 304
• monolines 26–28, 34–35, 77–78
• Monte Carlo simulations
  • American Monte Carlo methods 422, 428, 600, 643
  • exposure quantification 409–411, 414, 419–432, 448–450
• MPoR see margin period of risk
• MTA see minimum transfer amounts
• MTM see mark-to-market
• multilateral netting 132–135
• multilateral offsets 192–194, 197, 209
• mutualisation of losses 30, 35, 46, 79–80, 195, 205–210, 255, 262, 278
• MVA see margin value adjustment

•  
• Nasdaq Clearing (2018) 259–260
• negative expected exposure (NEE) see expected negative exposure
• negative exposure 289–291, 296–298, 302–306
  • see also expected negative exposure
• net gross ratio (NGR) 170, 244, 360–362
• net stable funding ratio (NSFR)
  • funding, margin and capital costs 390, 395, 398, 402–406
  • FVA and discounting 532, 542, 551, 558–562
  • regulation 63, 74–77
• netting
  • capital value adjustment 572–573
  • counterparty risk 45
  • credit value adjustment 506–510
  • exposure quantification 409–410, 413–419, 429–431, 441, 452
  • future value and exposure 302–305, 309
  • FVA 537, 540
  • impacts 130–136
  • margin value adjustment 600–602
  • over-the-counter derivatives 111–136
  • regulatory methodologies 344–346, 357–367
• New York Gold Exchange Bank (1869) 256
• NFC see non-financial counterparties
• NGR see net gross ratio
• NICA see net independent collateral amount
• novation 191–192
• NSFR see net stable funding ratio

•  
• OCC see Options Clearing Corporation
• off-market portfolios 304–305, 361, 375, 501
• OIS see overnight indexed spread
• omnibus segregation 196–197
• one-factor Hull-White model 432–438, 448
• one-way collateralisation 91, 471–472, 542–543
• operational risk 22, 67–68, 79, 113–116, 179, 220, 261
• optimal KVA management 580–585
• optimisation, xVA desks 642–647
• optionality 299–300
• Options Clearing Corporation (OCC) 258–259
• OTC see over-the-counter
• overcollateralisation 90–91, 155–157, 160–162, 275–276, 306–308, 360–362, 612
• overlaps 91–92, 192–194
• overnight indexed spread (OIS)
  • collateral 467–468
  • exposure quantification 433
  • funding 400–402
  • FVA and discounting 532, 535–536, 539, 542
• over-the-counter (OTC) derivatives
  • bilateral margins 33–34
  • central clearing 186–201, 208–210
  • central counterparties 29–36
  • close-out 111–136
  • global financial crisis 28–31
  • market 6–20
  • netting and close-out 111–136
  • regulation 63–64, 71, 78–83
  • risks 23–28

•  
• P&L see profit and loss
• P&L explain 631–634
• partially collateralised 307–308
• payment netting 112–113
• payment versus payment (PVP) 114
• PD see probability of default
• perfect collateralisation 466–467, 480–483
• PFE see potential future exposure
• P-measure 423–429, 599
• portfolio bifurcation 270
• portfolio compression 115–120, 192–194
• portfolio effects 88–92, 302, 304–308, 540–541, 584
• portfolio risk 223–229, 239
• positive exposure
  • future value 289–298, 301–307
  • quantification 409–418, 426, 434, 439–443, 448–462
  • see also expected positive exposure
• potential future exposure (PFE)
  • counterparty risk 48–50, 53
  • exposure quantification 409–411, 415–421, 424–429, 432, 442, 448–449, 452–460
  • future value 285–286, 289–292, 300–302
• pre-settlement risk 42–45
• price/pricing
  • capital value adjustment 565–566, 572, 575–589
  • credit 101, 486–487
  • debt value adjustment 499–500
  • margin value adjustment 600–601
  • xVA definitions 93–94, 100–107
  • xVA desks 609–621, 628, 638–645
• prisoner's dilemma 265–267
• probability of default (PD) see default probability
• procyclicality 210, 215, 230–243, 249–250, 254
• product types, counterparty risk 46–48
• proxy hedges 622
• prudent valuation 73, 568
• put options 514
• PVP see payment versus payment

•  
• Q-measure 428–429, 599
• qualifying CCP (QCCP) 84, 384–385
• quantos 426–427, 438, 522–524, 621

•  
• rating-linked parameters 155–157
• real world default probabilities 315–323
• reconciliations 151
• recovery rates 60–61, 315–338
• recovery values 21–24, 60–61, 86, 284, 321–322, 524
• regression 447, 600
• regulation 63–84
  • bilateral margins 63–65, 78, 80–84
  • capital 64–74, 81–84
  • central clearing 77–81
  • central counterparty 64, 72, 78–84
  • clearing 77–84
  • counterparty risk 63–65, 68–72, 77–84, 339–387
  • foreign exchange 68–69, 83, 357–359, 362–363, 372–373, 377
  • funding, margining and capital costs 390–391
  • liquidity 63, 69, 73–77, 80–82
  • margining 77–84
  • methodologies 339–387
  • over-the-counter derivatives 63–64, 71, 78–83
  • xVA components 87
• regulatory capital 54–56, 64–74, 81–87, 92–94, 120–122, 129–131, 339–387, 445–446, 495–500, 565–590, 606–607, 620–622, 634–638
• regulatory value 94
• re-hedging 176
• rehypothecation
  • exposure quantification 409, 430
  • funding value adjustment 529, 532, 543, 553
  • future value and exposure 310–314
  • margining 147–150
  • margin value adjustment 591–592
• relative returns 231–233
• remuneration 145–147
• replacement
  • costs 58–59
  • margining 176
  • tear-up impacts 269–270
• replicate-and-amend 172
• required stable funding (RSF) 398, 406, 551, 559
• resets 100, 140–141, 456–457
• restrikes 533
• retained earnings 581
• return on capital (ROC)
  • capital value adjustment 565–568, 572, 576–588
  • funding, margining and capital costs 391–394
  • xVA desks 613–615, 619, 634–635, 640–641
• return on equity (ROE) 621
• revaluation 421–423, 642
• rights of assessment 203, 259, 262–270
• right-way risk 368, 514–517, 520, 524
• risk-free rates 399–403
• risk limits 631–638
• risk mitigation
  • central clearing 185–211
  • clearing and margining 255–279
  • future value and exposure 287–288
  • initial margins 213–254
  • margining 137–183, 255–279
  • netting and close-out 111–136
  • settlement 137–183
• risk-neutral default probabilities 315–323, 326–327, 423–429
• risk participation agreements (RPA) 53
• risk-weighted assets (RWA) 65–68, 72, 340–347, 353–355, 372–373, 392–393, 575–578
• ROC see return on capital
• ROE see return on equity
• role of an xVA desk 609–619
• roll-off risk 420
• RORAC see risk-adjusted capital
• RPA see risk participation agreements
• RSF see required stable funding
• RWA see risk-weighted assets

•  
• SABR see stochastic alpha beta rho
• SA-CCR see standardised approach for counterparty credit risk
• SA-CVA see standardised CVA
• scenario generation 423–429
• schedule-based initial margin methodologies 242–254
• SCSA see standard credit support annex
• segregation
  • central clearing 196–197
  • funding value adjustment 529, 533, 543–545
  • future value and exposure 309–314
  • margining 147–150, 179
  • margin value adjustment 591–595
  • MF Global 179
  • xVA desks 614, 642
• sensitivities 241, 247, 326, 414, 420–422, 432, 621–627, 631, 642–643
• set-off 129–130
• settled recovery 322
• settlement 11–13, 42–45, 111–117, 120–122, 137–183
• settlement risk 42–45, 83, 111–114, 120–122, 420, 459, 478–480
• settle to market (STM) 150–151
• SIFI see systemically-important financial institutions
• SIMM see standard initial margin model
• single name proxies 328, 623
• skew 352, 426, 432–435
• skin-in-the-game 202, 259–260, 262–263
• SMART see SwapClear Margin Approximation Risk Tool
• SONIA see Sterling Overnight Index Average
• Sorenson–Bollier analogy 411–412, 434, 486, 619–620
• SPAN see Standard Portfolio Analysis of Risk
• SPE see special purpose entity
• special purpose entity (SPE) 24–25
• special purpose vehicles (SPV) 24–26, 34–35
• SPV see special purpose vehicles
• square root of time 38, 178, 230, 246, 293, 424, 441, 458, 575
• SSA see sovereigns, supranationals, and agencies
• standard credit support annex (SCSA) 165–166
• standard initial margin model (SIMM)
  • exposure quantification and margining 446–447, 461
  • margin value adjustment 591–592, 595–600, 604–607
  • methodologies 243–245, 249–254
• standardised approach for counterparty credit risk (SA-CCR) 72
  • capital value adjustment 569–573, 577, 586
  • regulatory methodologies 339–341, 357–386
• standardised CVA (SA-CVA)
  • capital value adjustment 571–575, 589
  • risk capital charge 340, 343–345, 351–358, 367, 378–382
• Standard Portfolio Analysis of Risk (SPAN) 223–229, 239, 259
• Sterling Overnight Index Average (SONIA) 403, 474
• STM see settle to market
• stochastic alpha beta rho (SABR) 433–435
• Stock Market Crash (1987) 258–259
• stressed EPE 373
• stress tests 68, 73
• structural approaches 520–521, 525
• sub-additivity 37, 228–229
• substitution 114, 146–147, 180, 186, 343, 379, 475, 478–479, 495
• succession events 326
• survival adjustments 502–503
• survival probabilities 536–537, 540, 553, 567
• SwapClear Margin Approximation Risk Tool (SMART) 241
• SwapClear service 29–32, 78, 187, 191–194, 200–201, 208, 219, 221, 238–241, 599
• swaptions
  • exposure quantification 411–412, 417, 422–427, 431–439, 448–458
  • funding value adjustment 560
  • margin value adjustment 597–598
  • xVA desks 619–628
• symmetric FVA formula 535–539
• systemically-important financial institutions (SIFI) 176
• systemic risk 24–28, 116, 131–133, 136, 166
• systems, xVA desks 641–645

•  
• tail risk 217–218, 625–627
• tear-up 123, 203, 257, 267–270
• termination 100, 137–141
• term liquidity premium (TLP) 404–405, 639
• thresholds 155–157, 161–163, 352, 364, 367
• time decay 614–615
• title transfer 145–147
• TLAC see total loss-absorbing capital ratio
• TLP see term liquidity premium
• too big to fail 6, 29, 35–36, 256
• total loss-absorbing capital (TLAC) ratio 390–392
• Totem service 99–100, 180, 396
• trade compression 115–120, 192–194
• TriOptima 115, 253, 644
• two-way collateralisation 91, 306, 467, 646
• TXU Electricity 123

•  
• uncleared margin rules (UMR) 81–83, 166–168, 181
• uncollateralisation
  • counterparty risk 41–44, 48, 54–55
  • margin value adjustment 594, 602–603
  • xVA definitions 90
• unwinds 7, 15, 106, 116, 415–416, 441, 504–508, 579–580

•  
• valuation adjustments
  • counterparty risk 55–62
  • reason for 87–88
  • xVA definitions 93–100
• valuation agents 151
• value-at-risk (VAR)
  • capital 68–69
  • derivative risk 36–39
  • future value and exposure 287–289
  • initial margins 227–240, 245–249
  • margin value adjustment 598–599
  • regulatory methodology 341, 345, 348–350, 367
• variance-covariance 245–249
• variation margin
  • CCP clearing risks 257–279
  • clearing 257–279
  • collateral 144–150, 157, 161–182, 466, 480, 483
  • exposure quantification 445–446, 457–461
  • future value and exposure 312–314
  • impacts and risks 257–279
  • initial margins 213–218
  • settlement 144–150, 157, 161–182
• variation margin gains haircutting (VMGH) 203
• VMGH see variation margin gains haircutting

•  
• walkaway agreements 123
• workout process 610, 615, 617
• wrong-way collateral 161, 243
• wrong-way risk (WWR)
  • clearing 191, 260–261
  • credit value adjustment 485, 488–489, 492, 514–527
  • exposure quantification 420, 427, 431, 4737
  • funding value adjustment 543, 563
  • future value and exposure 309–312
  • initial margins 215, 220, 241
  • margining 178, 180
  • quantification in CVA 516–518
  • regulatory methodologies 351–354, 370–374

•  
• xVA desks 615–617, 624–628, 644