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White Paper

How to calculate potential future exposure – A guide to best practice

Company: Misys

Misys case study

Category: Credit Risk

Published: 02 May 2013

Format:

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Overview

According to the International Swaps and Derivatives Association (ISDA), over-the-counter (OTC) derivatives saw a 12% market decline in 2010. Notional outstanding dropped from $475 trillion in 2007 to $419 trillion in 2010. However, this does not necessarily indicate change within the new OTC derivatives market. During bouts of economic volatility and regulatory pressure, the use of exposure management techniques, such as portfolio aggregation, collateral and netting are vital to a bank's ability to limit their credit risk exposure.

Potential future exposure (PFE) quantifies OTC derivatives, measuring counterparty/credit risk exposure over a certain period of time by analysing trades. The importance of an accurate PFE measurement system is shown by the substantial investment the banking industry has made into new hardware, software and operational processes.

This white paper looks at the importance of accurate exposure measurement. It reviews a number of exposure measurement techniques that are currently on the market. It looks at the importance of selecting the right method and provides you with pragmatic advice on measurement method selection to best meet regulatory and performance related requirements.

 

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