November 16, 2017 / 2:17 PM / a year ago

TriOptima extends risk analytics to KVA

LONDON, Nov 16 (IFR) - Post-trade processing firm TriOptima has expanded its triCalculate credit risk analytics service to include capital valuation adjustment (KVA), which reflects the cost of regulatory capital over the lifetime of an over-the-counter derivatives trade.

One of the alphabet soup of valuation adjustments that feed into derivatives pricing – collectively known as XVA – the KVA tool allows derivatives traders to understand the capital cost that swaps consume through of the life of the portfolio and calculates the upfront profit required to cover the costs.

The service provides users with an assessment of KVA implications before a trade is executed without delaying activity.

“KVA can have a significant impact on derivative pricing since capital charges remain even when market risk is accounted for in the trading book,” said Martin Engblom, co-CEO of triCalculate.

“With regulatory pressures mounting and modelling challenges around pricing KVA, we continue to develop functionality to support complex market needs with the addition of advanced yet efficient KVA calculations to our secure, web-based triCalculate service.”

The web-based analytics platform went live for testing two years ago in response to increased complexity around derivatives pricing as a result of stringent capital requirements and sweeping derivatives reforms.

A range of valuation charges including CVA, DVA, FVA and potential future exposure were already live on the platform and the latest addition comes just six months after margin valuation adjustment analytics were incorporated. The MVA tool enables swaps counterparties to accurately calculate the long-term cost associated with new rules that require collateral to be posted against derivatives that are not centrally cleared.

The platform is being used by a handful of trading clients to conduct full analysis of credit, capital and funding valuation adjustments across portfolios. Corporates are also beginning to test the service for pricing transparency and to compare derivatives pricing across dealers.

For large dealers, which typically run their own pricing systems, triCalculate is being used for scenario analysis and validation purposes. Second-tier banks are using the platform as a cost-effective primary system for managing counterparty risk on the CVA desk, or for sales desks to calculate the cost, risk and margin before offering prices to their swaps clients.

The triCalculate service is the NEX Group-owned firm’s first foray into analytics. It uses matrix probability methodology - technology designed for the gaming industry – to achieve greater pricing precision. The technology can incorporate over 100,000 simulations – more than 20 times the number that would go into a typical Monte Carlo simulation exercise. (Reporting by Helen Bartholomew)

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