Автор: Пользователь скрыл имя, 26 Марта 2012 в 02:39, реферат
Today over 30% of all London Stock Exchange transactions are CFD related. It may sound unbelievable but more and more professional and retail investors and traders switch to contracts for difference (CFDs) to take advantage of the leverage provided by the product. Now practically every bank in the UK provides CFD trading1.
The nature and utilisation of the main types of contracts for differences.
Interest Rate Swap
Currency Swaps
Commodity Swap
Credit Swaps
Forward Rate Agreements
The ISDA Master Agreement and risk management.
2.1. Master agreements
2.2. Credit risk management
2.3. Legal risk management
Conclusion
Bibliography
Clearing Corporation, to stand between each buyer and seller, guaranteeing the performance of each contract. Counterparty credit risk thereby is reduced because the clearing agency collects margin from each member to guarantee all participants transactions. In effect, the risk of each individual transaction is mutualized across all clearing agency participants. With respect to OTC derivatives, credit risk can be reduced and controlled by establishing procedures to measure and monitor credit risk exposure, master agreements for netting purposes, counterparty selection criteria, and collateral.
Dealers and end-users should measure credit risk exposure in terms of current exposure and potential exposure. Current exposure represents credit risk at a given moment and can be expressed as the aggregate value of an entity’s outstanding contracts, taking into account legally enforceable netting, if applicable. Dealers should measure their current exposure daily, while the frequency with which endusers should undertake such monitoring depends on the extent of their derivatives activities. Potential exposure is an estimate of the degree to which the current exposure of a portfolio could increase over a selected time period. Thus, potential exposure represents the future replacement costs of derivatives transactions.
Assessing potential exposure is more difficult and requires reliance on simulation analysis and options valuation models. This process includes evaluating the effects of movement in the prices of underlying variables. Once potential exposure has been evaluated, it should be reflected as an “add-on” to current exposure when evaluating the total credit risk that an entity’s portfolio represents.
Dealers and end-users should aggregate their derivatives and other credit exposures with respect to each of their counterparties. Aggregated credit exposures should take into consideration enforceable netting agreements. Another good practice is to avoid concentrating transactions with a single counterparty. Dealers and end-users should calculate exposures regularly and compare them to the counterparty credit limits. A separate credit limit should be established for each counterparty prior to entering into a derivatives transaction with such a counterparty, and the credit limit should be considered together with that counterparty’s other credit obligations to the entity.
Current exposure involves summing the positive and negative exposures represented by transactions in a portfolio. Potential exposure requires modelling the effects of various changes in prices and volatilities on the entire portfolio.
As part of managing credit risk, dealers and end-users should seek, when possible, to enter into master agreements with each of their counterparties to document existing and future transactions. Under a bilateral closeout netting agreement, upon a party’s default, obligations from the derivatives transactions covered by the netting agreement are based on the net value of those transactions. Thus, a single net closeout amount for similar contracts with the same counterparties is paid following the default of one of the counterparties. In its proposal to recognize the validity of bilateral netting agreements for determining credit exposures, the Basle Committee on Banking Supervision stated that netting agreements would be recognized if legally enforceable in all applicable jurisdictions, but netting agreements with walk-away clauses (allowing a non defaulting counterparty to avoid paying its obligations to the defaulting party) would not be recognized. As new products are developed dealers and end-users should address the legal enforceability of such products. Guarantees for credit enhancement purposes can be provided by banks, insurance companies, and parent companies for their subsidiaries.
Dealers and end-users should consider using credit enhancements and related arrangements such as collateral, letters of credit, guarantees, and special purpose vehicles. In addition, an entity should consider limiting the extent to which its assets are encumbered because they are being used as collateral. Collateral as a credit enhancement between financial counterparties often occurs on a bilateral basis. Thus, neither party will post collateral at the initiation of a contract, but if the obligation of one counterparty to the other reaches a prescribed level, an obligation on the part of that counterparty to post collateral is triggered. In situations where one of the counterparties is a weaker credit, the stronger credit might impose a one-way collateral agreement. The weaker credit would then have to post collateral at the agreement’s inception.
Independent credit risk management is critical both for dealers and end-users. The credit risk management function is responsible for: (i) approving credit exposure measurement standards, (ii) setting credit limits and monitoring adherence to such limits, (iii) reviewing counterparty creditworthiness and concentration of credit risk, and (iv) reviewing and monitoring risk-reduction arrangements. Dealers should have their credit exposure monitored by an independent credit risk management group. For end-users, this function need not necessarily be performed by a separate group, although this task still should be performed by someone independent from dealing personnel. Independence is essential to prevent conflicts of interests and to ensure objective credit exposure assessment12.
2.3. Legal risk management
Legal risk arises from the possibility that an entity may not be able to collect on a winning position, or enforce a hedge, because a contract may not be enforceable. Legal risk can arise from inadequate documentation; actions of a counterparty without authority or subject to certain legal restrictions; the uncertain legality of the contract itself, including contractual provisions requiring collateral; and the effect that the bankruptcy or insolvency of a counterparty can have on contractual remedies, such as netting provisions. The issue of legal risk is particularly vexing regarding derivatives because many existing laws were written before the types of transactions to which they might apply were even imagined. Often, the form rather than the substance of a particular derivatives transaction can determine the applicable legal framework.
The most important legal concern that market participants are faced with when they use credit derivatives is a question of legal uncertainty. There are only two published opinions directly involving the enforceability or interpretation of credit derivatives.
Inadequate documentation of OTC derivatives transactions can raise issues regarding legal risk, although such concerns have been alleviated in recent years. Standard industry forms, such as the International Swaps and Derivatives Association’s (ISDA) Master Agreement, now exist and are flexible enough to reflect the many varied terms of OTC transactions. Of course, the very flexibility of such forms requires that the parties to an OTC transaction ensure that the form chosen is appropriate and that the effects of the particular provisions selected are well understood.
State law statute of frauds requirements applicable to a given OTC derivatives transaction can pose another form of documentation risk. OTC derivatives transactions are often entered into by telephone, to be followed later by a writing setting forth the terms of the agreement. A large market movement against one of the parties prior to a written confirmation of the terms of an oral agreement could cause that party to attempt to repudiate the contract. In New York, amendments to the New York Commercial Code have eased concerns about such oral agreements by creating an exception for ‘qualified financial contracts.’ An agreement that constitutes a qualified financial contract is not void for lack of a writing if there is either sufficient evidence that a contract has been made, or the parties agree by prior or subsequent written agreement to be bound by such a contract from the time they reach agreement (by telephone, e-mail, or otherwise). It has been noted that New York’s statute of frauds exemption does not include all financial contracts. Oral contracts with a natural person as a counterparty are not covered, and master agreements must be checked to ensure they apply to oral contracts.
Effective legal risk management occurs before an entity enters into a transaction and essentially requires that the proper homework has been done. An entity’s legal counsel, in consultation with its risk management personnel, should develop the policies and procedures relating to legal risk to address issues such as the authority of the individual representing the counterparty to enter into a transaction and the legal and regulatory authority of the entity itself to enter into a particular transaction. Agreements that govern derivatives transactions should be evaluated to determine the sufficiency and legality of their contents.
Conclusion
Properly used, derivative products provide a valuable contribution to the nation’s capital markets. Although the development of such products will continue to raise issues regarding how those products should be integrated within the existing oversight structure (example, capital standards, accounting rules, disclosure requirements, and sales practices), the one area where there is a well developed consensus is the need for sophisticated risk management strategies. In this regard, derivatives are not unique in raising concerns regarding the management of highly leveraged, complex products, but they do highlight the need for managers and regulators to evaluate such products carefully to ensure that their benefits are not overwhelmed by their risks.
The terms of a master agreement will, among other things, permit a party to terminate that agreement and all related trades upon the counterparty’s bankruptcy or insolvency. However, a well-functioning risk management operation should consider all the facets of risk emanating from derivatives usage. While models and computer analytics have been developed for pricing, measuring, and managing market risk, the industry has also made substantial progress in formulating contractual solutions to address credit and legal risk. Development of the ISDA Master agreement is a good example.
The ISDA Master agreement, while standardized in many ways, can accommodate the unique characteristics and contractual needs of counterparties. This is in sharp contrast with many regulatory approaches, whose “one size fits all” approach may be a counterproductive obstacle to innovative practices. The master agreement has evolved in response to both market growth and broad industry acceptance of particular practices. Specific market events will continue to affect its development.
Bibliography
1 independentinvestor.co.uk, CFDs Trading and Contracts For Difference
http:// ”CFDs Trading and Contracts For Difference” www.independentinvestor.co.uk/
2 Investopedia, CFA Level 1 – Swaps, http://www.investopedia.com/
3 Investopedia, CFA Level 1 - Interest Rate and Equity
Swaps, http://www.investopedia.com/
4
Investopedia, CFA Level 1 - Currency Swaps, http://www.investopedia.com/
5 Commodity swap, http://www.answers.com/topic/
6 Wikiinvest, Credit Default Swap (CDS), http://www.wikinvest.com/wiki/
7 Financial-edu.com, Total Return Swap (TRS), http://www.financial-edu.com/
8
Credit Derivatives – Total Return Swap, http://www.finsoft.com/
9
Bankopedia, Credit Spread Swap, http://www.bankopedia.net/css-
10 Wikinvest, Forward Rate Agreement, http://www.wikinvest.com/wiki/
11 Eric Benhamou Swaps Strategy, London, FICC, Goldman Sachs International
12 Bushan K. Jomadar, The ISDA Master Agreement - The Rise and Fall of a Major Financial Instrument, August 24, 2007