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SolutionPrimer

Financial Services

OneSumX Credit Risk

Counterparty credit risk (the risk to each party of a contract that the counterparty will not live up to its contractual obligations) and credit risk (including Credit VaR) are driven by several parameters which are highly sensitive to market and behavioral risk. Both credit and counterparty risk appear in all types of financial contracts, from simple bonds to credit derivatives, and impact most financial events arising during the lifetime of financial instruments.

The analysis of credit and counterparty risk is applied in risk management and capital adequacy, pricing, profit and loss, is also crucial in defining the strategies of business evolution.

OneSumX Credit Risk2

Financial institutions are heavily exposed to credit risk and thus failure to manage counterparty risk will result in major losses. This will impact not only the financial industry itself but more importantly the counterparties that are linked and supported by financial institutions; in other words the entire market.

Credit and counterparty risk analysis is part of business across most departments in financial institutions; it links and supports the front office management, back office analytics, treasury office, asset liability managers, regulatory compliance, risk managers, and the board of directors.

OneSumX Credit Risk

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Institutions must be able to identify and model underlying parameters of credit and counterparty risk, together with their integration to other financial risks; moreover, they should be able to estimate and report the current and future possible impacts of credit and counterparty risk with regards to value and liquidity measurement and risks under both normal and stressed conditions.

A safe and robust financial system isepitomized by firms displaying steadyprofitability with minimal losses, and resultsthat enable increased confidence of both themarket and the regulators. This can only beachieved when firms have in-depth andthorough insight into their credit andcounterparty risk. OneSumX Credit Risk canenable firms with all the elements neededfor such comprehensive insight.

Counterparty credit worthinessTo gain accurate insight into the maximumexposure of credit losses, firms need to beable to identify and set the parametersrelated to credit worthiness of acounterparty. Additionally firms need toensure that risk against credit losses isminimized. OneSumX Credit Risk enablesboth, by identifying credit ratings, probabilityof default and migrations (transition)matrices (MMs), defining descriptivecharacteristics, such as seniorities, regions,etc. It also considers the hierarchy amongcounterparties and models behaviorcharacteristics, such as recovery rates aswell as defining and/or considering themarket driven credit spreads.

Credit exposure static anddynamic evolutionAs credit exposures dynamically changeover time, institutions must be able tomeasure, manage and adjust them byconsidering both current and futureconditions driven by both static anddynamic market, credit and behavior riskfactors. Our solution calculates current andexpected gross and net credit exposures,computes the degree of exposures in bothdefault (EAD) and non-default cases, andestimates potential future and effectivecredit exposures at more than one futuredate. It also identifies and considersvolatilities and adjustments of creditexposures and tracks the evolution ofcredit exposures under static and dynamiccredit and market conditions.

Hedging strategies as well as credit enhancements are applied when needed, not only for absorbing credit risk losses but more importantly for increasing the degree of robustness and condence during volatile times.

Risk managementCredit and counterparty risks appear in allfinancial instruments that are placed in bothon and off balancing accounts and creditportfolios, which can result in both expectedand unexpected losses. OneSumX Credit Riskcalculates both expected and unexpected lossesand applies stress testing scenarios in all creditand counterparty risk parameters to measureand manage credit and counterparty risks.

In increasingly volatile markets, it is also vitalthat firms consider credit and counterpartyrisks as they become highly sensitive tomarket and behavior risks – our solutionconsiders deterministic and/or stochasticscenarios, and applies credit VaR riskmeasurements based on single and multifactor model approaches. It also considerswrong way risk and both specific idiosyncraticand general sensitivities of counterparties tomarket and credit risk factors.

Additionally firms need to mitigate credit andcounterparty risks by employing creditenhancements such as collaterals, guaranteesand credit derivatives, and applying hedgingproducts, credit enhancements, limits, nettingpolicies and strategies to minimize the riskagainst credit exposures. Hedging strategiesas well as credit enhancements are appliedwhen needed, not only for absorbing creditrisk losses but more importantly forincreasing the degree of robustness andconfidence during volatile times.

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OneSumX Credit Riskcalculates credit valuationadjustment (CVA), debtvaluation adjustment (DVA)and funding valuationadjustment (FVA) andenables exploration of thecorrelation between credit,market and behavioral riskin an integrated approach.

The solution identifies and estimates thedegree of systemic and concentration basedon counterparty risk and credit exposureanalysis and enables compliance withregulatory requirements such as Basel II/III.The analytical tools within our solutionensure that this credit and counterpartyanalysis and management can be reportedto a firm’s stakeholders.

OneSumX Credit Risk is part of our overallOneSumX for Risk Management offering andhandles the many and varied complexcredit and counterparty risk analysiselements that firms must consider. Otherfinancial risks such as market or liquidityrisk are handled within the respectivemodules of the OneSumX suite.

All our financial risk management solutionelements are based on a contract-basedapproach, whereby each financial instrumentis linked to a specific counterparty, togetherwith its related market conditions andbehavior characteristics, are employed inthe solution.

This contract-centric approach enablesfirms to identify the counterpartycharacteristics and credit worthinesstogether with behavioral characteristics andcredit spreads, driven by the marketconditions, in a consistent manner. Theevolution of the credit exposures can alsobe estimated considering both staticanalysis and dynamic simulation in regardsto the evolution of counterparty ratings,future market conditions and behavioralcharacteristics.

In addition, credit risk exposure, liquidity,pricing, valuation adjustments, systemicand concentration risks analysis are keyresults that are available as a result of thecredit and counterparty risk analysiscapabilities of our financial riskmanagement solution.

Figure 1 – Credit and counterparty risk analysis elements

Analysis Elements in Credit & Counterparty Risk

Risk management

Mitigation & Hedging

Counterparty

Credit Worthiness

Analysis

Reports

Credit exposure

Static & Dynamic Evolution

• Expected & Unexpected Losses

• Stress Testing• Credit VaR• Credit Losses & Lines• Wrong Way Risk• Sensitivities• Credit Enhancements

• Ratings & Migrations• Probability & Default• Descriptive Characteristics• Hierarchy• Behavior• Market Credit Spreads

• Static/Dynamic• Liquidity• Valuation & Pricing• CVA / DVA / FVA• Integration to Market

& Behavior• Systematic & Concentration• Regulatory Compliance

• Current & Expected• At Default Case• At Non-default Case• Future & Effective• Volatilities & Adjustments

Credit and

counterparty

analysis

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Credit and counterparty risks appear in all financial instruments that are placed in both on and off balancing accounts and credit portfolios, which can result in both expected and unexpected losses. OneSumX Credit Risk calculates both expected and unexpected losses and applies stress testing scenarios in all credit and counterparty risk parameters to measure and mange credit and counterparty risks.

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OneSumX Credit Risk can be used tocalculate the expected and unexpectedcredit losses by considering deterministicstress scenarios as well as stochastic process(Credit VaR) approaches. Specific risk casessuch as wrong way risk, sensitivity analysis,migration, and credit risk exposure hedgingare also key elements within the solution.

The data source produced by our OneSumXRegulatory Reporting module can be fed into

the risk management solution to producereliable and consistent MIS/risk reports thatprovide clear insight into the businesses’profitability, performance, and risk analysis.

Both standard and customized reports anddashboards, for analytics specifically for theC-level and board of directors levels, areavailable as part of the solution.

OneSumX Credit Risk

Contract-centric approach and dynamic simulation

Figure 2 – Contract-centric approach and dynamic simulation

Contract-centric approach Dynamic simulation

Financial Contracts

Counter-parties Markets

BehaviorStrategy

INPUTELEMENTS

ANALYSIS ELEMENTS

RISK

Tt

e5e4e3e2e1Financial events en

Liquidity Value (V)

Incomedv/dt

Sensitivitydv/drf

VaRLaR EaR

Market evolution

New counterparties

Future behavior Strategies on new production

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Specific risk cases such as wrong way risk, sensitivity analysis, migration, and credit risk exposure hedging are also key elements within OneSumX Credit Risk.

When you have to be right

Contact information:

APACWolters Kluwer5 Shenton Way, #20-01/03 UIC BuildingSingapore 068808

EMEAWolters Kluwer25 Canada Square, 41st Floor,Canary Wharf,E14 5LQ London,United Kingdom

AmericasWolters Kluwer130 Turner Street,Building 3, Fourth Floor,Waltham, MA,U.S.

About Wolters Kluwer

Wolters Kluwer (WKL) is a global leader in professional information, software solutions, and services for the healthcare; tax and accounting; governance, risk and compliance; and legal and regulatory sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technologies and services. Wolters Kluwer reported 2019 annual revenues of €4.6 billion.

The group serves customers in over 180 countries, maintains operations in over 40 countries, and employs approximately 19,000 people worldwide. The company is headquartered in Alphen aan den Rijn, the Netherlands. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt (ADR) program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

© 2020 Wolters Kluwer Financial Services, Inc. All Rights Reserved.

For more information visit www.wolterskluwer.com/en/solutions/onesumx-for-finance-risk-and-regulatory-reporting. Follow us on Twitter, Facebook, LinkedIn and YouTube.