Counterparty trading limits revisited

Mourad Berrahoui (Lloyds)

Wednesday 27 February 2019, 18:00-19:00.

The seminar will be followed by a reception.

Abstract

The utility of Potential Future Exposure (PFE) for counterparty trading limits is being challenged by new market developments, notably widespread regulatory Initial Margin (using stressed 99% 10-day exposure), and netting of trade and collateral flows. In addition, PFE has other drawbacks: lack of comparability across counterparties; lack of consistency with credit mitigation; insensitivity to exposure distribution changes above its reference quantile; exclusion of existing credit losses (i.e. incurred CVA).  We introduce the concept of Potential Future Loss (PFL) which combines expected shortfall (ES) and loss given default (LGD) as a replacement for PFE. With two extensions to include existing credit losses (Adjusted PFL) and consistency with credit mitigation (Protected Adjusted PFL) both new and pre-existing challenges are resolved. We provide theoretical background and illustrate with numerical examples.

Based on joint work with: Benjamin Poncet (Lloyds) and Chris Kenyon (MUFG Securities).

Speaker

Mourad Berrahoui is Head of Counterparty credit risk modelling  within Lloyds Banking Group. He has previously occupied various senior quant roles at Natixis, Commerzbank, Morgan Stanley, Nomura. He holds a Masters (DEA)  in Probability and Finance from Universite Pierre Marie Curie (Paris).

Venue

Citi Stirling Square
5-7 Carlton Gardens
London SW1Y 5AD

 

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