Recently I've completed a partnership between a large regional bank in Hong Kong and my company, SuperDerivatives (SD), where we will be providng them with a system that can perform on-demand mark-to-market valuation of their structured products portfolio.
And from my experience working with regional banks, I've found that most are still very much relying on periodic counterparty valuation for their structured products mark-to-market. This is a serious problem.
Given recent market volatility, relying on counterparty for periodic mark-to-market valuation can have a major impact on credit risk management and CVA analysis. But unlike investment banks who spend tens of millions in systems, modelling and market data, regional banks do not process the resources, the technology, or the expertise needed to properly value their structured products portfolio, and this is a big challenge to many market risk managers in these banks.
Some would argue that the majority of them are conducting back-to-back trades so they're not really taking on that much risk and the volume is a fraction compared to that of an investment bank.
While it is true that by doing deals back-to-back, the market risks of these structured products trade are nullified, the counterparty credit risks or collateral risks still have to be properly maintained. And when it come to risk management, the volume of deals is irelvant. A proper risk management due diligence should be consistent regardless of volume or types.
Risk managers, managing various risks of the bank in today economic environment is like navigating a tank on an unstable mine field. Banks that are still relying on counterparty valuation for mark-to-market should start seriously consider strengthening their procedures and systems, in case one accidently detonates.
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