Managing a profitable balance sheet is more challenging than ever. With Basel III and the more immediate Dodd-Frank regulation on the horizon, a tool such as FTP is vital to ensure an effective centrally managed liquidity strategy. Post-crisis, whilst the economic situation is improving, allocating sufficient liquidity costs quickly and efficiently to the correct business-line is paramount.
Karin Bergeron is a trader on the CVA desk at Scotiabank. She is responsible for pricing and hedging CVA as well as providing direction on policy, technology and modeling initiatives that impact her business. Karin has been with the Global Banking and Markets division of Scotiabank for 9 years, and involved with CVA for the last 5. marcus evans had the privilege to speak to Karin in an exclusive interview below.
CVA is one of the biggest talking points in the financial sector nowadays. Is this just due to regulatory impetus or is there real competitive advantage to be gained from this?
KB: CVA is not just a regulatory mechanism; if managed correctly, CVA can help a firm assess and manage its risks appropriately.
When it comes to the valuation of derivatives, how important is the selection of the appropriate discounting methodology and do discrepancies between institutions matter?
KB: This can be very important, as it may materially change derivatives pricing. Institutions that are not properly valuing their trades can miss opportunities to put on beneficial trades as well potentially putting on unprofitable trades. It becomes difficult to look to a market for pricing as the discounting methodology for two identical trades can differ due to counterparty and portfolio considerations.
The one other thing to note in this instance, however, is that the push to centralized counterparties and standardized CSAs will help alleviate discrepancies in the discounting methodology required for collateralized positions, so it will really be the proper development of accurate discounting methodologies for uncollateralized trades that will make the bigger difference in the future.
In recent years awareness seems to have increased of the importance of collateral when it comes to the valuation of a derivative – for instance, discussion around CSA discounting and closeouts is becoming far more common at the cutting edge institutions. Do you think that this is something that is fully understood and how important do you think it is to better comprehend it?
KB: I think it is generally quite well understood, but really “correctly” taking all the details into account is actually quite difficult, and for practicality many institutions choose to take a more simplistic approach. What is always important when making such approximations is to understand when making them can hurt you and have a way to prevent taking losses despite the necessary simplifications.
Karin Bergeron will be a speaker at the marcus evans before the forthcoming CVA Funding and Valuation for Derivatives Conference, May 17-18, 2012 in New York City, NY.
For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, marcus evans at 312-540-3000 ext. 6625 or Michelew@marcusevansch.com.
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