SimCorp: Dodd-Frank is a catalyst for change
31 May 2012 New York
Image: Shutterstock
Investment management software and services provider SimCorp has released a white paper examining credit risk exposures and how buy-side firms can use the US Dodd-Frank Act to assess their readiness for credit risk reforms and implement risk management.
The white paper, which is authored by Else Braathen, the head of the risk management domain at SimCorp, looks at the Dodd-Frank definition of credit risk exposures and the obligations and opportunities that this presents to buy-side firms, assessing a firm’s readiness for credit risk reforms, and credit default management.
The white paper’s release comes as 30 percent of respondents to a SimCorp poll, which surveyed approximately 100 executives from 50 buy-side firms in the US, admitted that it would take days or weeks to estimate the profit and loss of a potential default of the companies to which they are exposed.
Dodd-Frank says that credit exposures need to be measured across all transactions and holdings to limit the ripple effects of company defaults, explained SimCorp.
“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 Braathen.
The white paper goes on to identify eight aspects an effective credit default risk solution.
These include: consolidating position-keeping across all holdings for an accurate view of exposure; identifying exposures for all issuer and counterparty risks; showing underlying issuer risks derived from the underlying assets of derivatives and funds; including collateral to view mitigated counterparty risk exposures; and aggregating all of these to gain a complete view of exposure in case of a default.
David Kubersky, the managing director for SimCorp North America, said: “While OTC 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.”
“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.”
The white paper, which is authored by Else Braathen, the head of the risk management domain at SimCorp, looks at the Dodd-Frank definition of credit risk exposures and the obligations and opportunities that this presents to buy-side firms, assessing a firm’s readiness for credit risk reforms, and credit default management.
The white paper’s release comes as 30 percent of respondents to a SimCorp poll, which surveyed approximately 100 executives from 50 buy-side firms in the US, admitted that it would take days or weeks to estimate the profit and loss of a potential default of the companies to which they are exposed.
Dodd-Frank says that credit exposures need to be measured across all transactions and holdings to limit the ripple effects of company defaults, explained SimCorp.
“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 Braathen.
The white paper goes on to identify eight aspects an effective credit default risk solution.
These include: consolidating position-keeping across all holdings for an accurate view of exposure; identifying exposures for all issuer and counterparty risks; showing underlying issuer risks derived from the underlying assets of derivatives and funds; including collateral to view mitigated counterparty risk exposures; and aggregating all of these to gain a complete view of exposure in case of a default.
David Kubersky, the managing director for SimCorp North America, said: “While OTC 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.”
“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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