The Fundamentals of Counterparty Risk

Training Description

The Fundamentals of Counterparty Risk

The Fundamentals of Counterparty Risk training provides a comprehensive understanding of the key mechanisms and challenges in managing counterparty risk across financial transactions.

In a financial landscape where regulators and institutions are tightening their focus on risk management and compliance, mastering counterparty risk identification, measurement, and mitigation is crucial. This training is designed to help professionals navigate risk exposure in derivatives, loans, and structured financing operations.

This course covers the core principles of counterparty risk, including Potential Future Exposure (PFE), Credit Valuation Adjustment (CVA), and risk mitigation strategies such as margin calls and collateral management. Additionally, you will explore the impact of global regulations such as Basel III and EMIR. Through hands-on applications, you will gain expertise in quantitative risk assessment methodologies and how to implement effective hedging strategies.

By combining theoretical concepts with real-world case studies, this training equips you with the tools to understand the complexities of counterparty risk. You will develop the skills necessary to secure financial transactions, optimize risk management strategies, and ensure regulatory compliance.

Who Should Attend?

• Risk managers and compliance officers looking to strengthen their expertise in counterparty risk management.
• Traders and portfolio managers seeking a deeper understanding of risk exposure in financial markets.
• Financial analysts and investment professionals working with derivatives, structured finance, and credit risk assessment.
• Regulatory and audit professionals ensuring compliance with Basel III, EMIR, and risk mitigation frameworks.

Key Learning Outcomes

• Understand the fundamentals of counterparty risk and its implications in financial transactions.
• Master quantitative methods for measuring risk exposure, CVA, and PFE.
• Analyze regulatory requirements under Basel III, EMIR, and evolving financial risk frameworks.
• Apply hedging strategies and learn to manage margin calls, collateral, and liquidity risk.

Training Program

The Fundamentals of Counterparty Risk

I. Key Concepts and Basic Mechanisms

• Definition of counterparty risk and distinction from traditional credit risk
• Conceptual nuances: bilateral risk (derivatives) vs. unilateral risk (loans), settlement risk vs. counterparty risk
• Impact of financial crises: the role of CDS in the 2008 crisis (AIG case study)

Practical Case:

Analyze a derivatives portfolio to identify counterparty risk.

II. Measurement and Calculation of Counterparty Risk

• Calculation of Exposure at Default (EAD) and Expected Positive Exposure (EPE): estimating exposure at default
• Introduction to Potential Future Exposure (PFE) and the impact of mark-to-market
• Risk scenario simulations: Monte Carlo approach and stress tests

Practical Case:

Manual calculation of EAD on an interest rate swap.

III. Modeling and Complex Risks

• Identification of Wrong-Way Risk (WWR): correlation between exposure and default probability
• Advanced models: Credit Value Adjustment (CVA) and Debt Value Adjustment (DVA)
• The role of collateral and guarantees: Credit Support Annex (CSA) and margin call dynamics

Practical Case:

Calculate CVA using Excel/Python.

IV. Mitigation and Legal Framework

• Risk mitigation instruments: bilateral and multilateral netting, portfolio compression
• Central Counterparties (CCPs): advantages and limitations in risk management
• Collateral optimization strategies and funding costs

Practical Case:

Analysis of Lehman Brothers' bankruptcy and its impact on CCPs.

V. Regulatory Context and Compliance

• Key regulations: Basel III/IV, capital requirements (SA-CCR, IMM), CVA charge
• Comparison of regulatory frameworks: Dodd-Frank (US) vs. EMIR (EU)
• Stress testing and reporting: regulatory scenarios (BCBS, EBA)

Practical Case:

Complete an SFCR/FRTB report on counterparty risk measurement.

VI. Innovations and Trends

• Impact of ESG standards on counterparty evaluation and risk management
• Blockchain and smart contracts for automated collateral management

Practical Case:

Analyze the impact of ESG criteria on counterparty risk assessment in a financial asset portfolio.