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The global financial crisis has sparked a rethinking of the reporting of fair value disclosures and given rise to concern about counterparty credit risk inherent in derivative portfolios. The credit position of an organization and their counterparties is critical to the transparent valuation of earnings and compliance with changing regulatory requirements.
With auditors, shareholders and regulators insisting on transparency, verifiability and validity of accounting figures, getting the credit haircut or credit value adjustment (CVA) wrong, or excluding it from earnings statements, will raise serious concerns. Organizations cannot afford to ignore this issue, doing so risks the reputation of the firm and the confidence of stakeholders which could ultimately lead to potential business failure.
Triple Point has been helping companies optimize, value and manage their derivative portfolios for over 18 years. By taking into consideration counterparty risk, we enable organizations to provide consistent fair value measurements and disclosures which give all stakeholders confidence in the valuations of assets and liabilities.
Below is a list of 4 ‘must-have’ features that will enable organizations to make accurate credit value adjustments in their fair value disclosures:
- 360 View of all Counterparties – A single, automated view of each counterparty, showing the asset and liability position which indicates the basis for the credit adjustment.
- Collateral Management – Ability to analyse all collateral within master netting agreements, ensuring a contractually accurate view of exposure and liquidity obligations.
- Credit Rating Assessment – Assessing the credit rating of the counterparty or your internal rating in conjunction with the maturity of each transaction will determine the credit adjustment, typically based on credit default swap (CDS) rates to the valuation.
- Transparent Accounting for CVA – Separate accounting entries for each CVA, showing the methodology for each credit adjusted Mark-to-Market
All of the above functionality is available within Triple Point’s Commodity XL for Fair Value Disclosure, a Software Assisted Compliance (SAC) solution which ensures organizations are able to optimize their portfolios, disclose accurate valuations, comply with regulations (IFRS 7, ASC 820) and maintain stakeholder confidence. Counterparty credit risk should also be considered when applying hedge accounting and calculating hedge effectiveness. If you would like to learn more click here.