With fragmented credit limits a common legacy in the industry, many financial institutions struggle to get an up-to-the-minute, big-picture view of their credit exposures. A growing number of firms are turning to FIS, whose Adaptiv Credit Risk allows them to measure, manage and control counterparty exposures in real time under a global limits framework.
Adaptiv Credit Risk enables organisations to monitor counterparty exposures that arise from the trading book, while catering for traditional credit exposures resulting from lending, contingent and trade finance activities in the banking book. Combined with issuer risk, this provides a consolidated view of credit risk across the enterprise in a single solution. As a result, institutions know their exposures in real time and can react quickly to any credit risk events.
“Most Asian banks’ credit risk is dominated by traditional banking book lending and contingent activities, so it is important for them to have a credit risk monitoring system that covers both counterparty and lending risks,” says Andrew Bateman, head of capital markets, buy-side and cross-asset solutions, FIS. Banks also face challenges in managing banking book collateral and complying with large exposure regulations, he says.
The FIS solution offers best-practice management of netting and collateral agreements in compliance with latest margin reform rules. Every deal can be checked against complex rules to assess its eligibility against agreements. Legal opinions are also managed within Adaptiv, setting the overarching conditions for the eligibility of netting and collateral.
“Central clearing, margining and general collateral arrangements are meant to reduce the amount of counterparty risk in the financial markets, but there are legal complexities as to their effectiveness, which need to be taken into account in a best practice counterparty risk system,” says Bateman.
Adaptiv Credit Risk can fully integrate with Adaptiv Analytics, a high-performance Monte Carlo engine that can operate in incremental mode, allowing for real-time recalculation of exposures as deals are entered or trialled.
To calculate accurate comprehensive real-time credit exposures, the system incorporates a flexible set of exposure measurement methodologies, including Monte Carlo and potential future exposure simulation, mark-to-market plus add-on, standard approach to counterparty credit risk (SA-CCR), securities financing transaction haircuts-based method, issuer and settlement risk, and lending – net and gross of credit mitigation. Extensive diagnostics for exposure measures are available – for example, with SA-CCR users can drill down to all calculation parameters and intermediate results at deal, hedging set, margin set and netting set levels.
Most Asian banks’ credit risk is dominated by traditional banking book lending and contingent activities, so it is important for them to have a credit risk monitoring system that covers both counterparty and lending risks
Andrew Bateman, FIS
“Complying with the latest regulatory measurement of counterparty risk, for example SA-CCR, is a challenge [because] while this is meant to be a ‘standardised’ approach, there are many interpretation issues, grey areas and potential complexities with this methodology,” Bateman says. “A good counterparty risk system needs to have the flexibility to adapt to these differing interpretations.”
Adaptiv Credit Risk has a pre-deal checking application programming interface (API) that will integrate with various front-office systems. Pre-deal valuation adjustment pricing metrics can be included alongside the results of credit limit checks. The low-latency credit-checking infrastructure responds to pre-deal limit checks within one to 10 milliseconds.
The system also has a module called Optimal Counterparty Selector that allows dealers to check a given transaction against a range of counterparties or clearing venues and assess where it would be most cost-efficient to place the deal. Configurable workflows are available for managing credit life-cycle events, such as limit approvals and reviews, breach management and pre-deal approvals. Adaptiv Credit Risk is one of the few credit risk solutions with bank book collateral management capabilities.
A leading Thai bank has implemented Adaptiv Credit Risk to streamline its customers’ experience by speeding up credit decisions and improving lending efficiency, while providing a consolidated view of credit risk across the business. FIS was able to help the bank overcome the obstacles to digitising its customer interaction, tapping into the company’s portfolio of financial technology and APIs to enable the bank to centralise and reuse existing data.
“Many banks still calculate regulatory exposures within finance, accounting or capital systems, quite separately to risk systems,” says Bateman. “FIS strongly believes risk systems should be calculating both regulatory and internal measures of counterparty risk, because regulatory measures are becoming more risk-sensitive and hence require risk management expertise to interpret correctly, and because of the commonality of source trade, agreement and market data.”
An Asia Risk judge says: “Adaptiv Credit Risk is functionally rich and gives an accurate and comprehensive overview of counterparty risk. It is one of the few packaged counterparty risk products that has survived and, indeed, prospered with extended functionality and platform performance.”