Counterparty Trading Limits Revisited:CSAs, IM, SwapAgent(r), from PFE to PFL
Mourad Berrahoui and
Papers from arXiv.org
The utility of Potential Future Exposure (PFE) for counterparty trading limits is being challenged by new market developments, notably widespread regulatory Initial Margin (using 99% 10-day exposure), and netting of trade and collateral flows. However PFE has pre-existing challenges w.r.t. portfolios/distributions, collateralization, netting set seniority, and overlaps with CVA. We introduce Potential Future Loss (PFL) which combines expected shortfall (ES) and loss given default (LGD) as a replacement for PFE. With two additional variants Adjusted PFL (aPFL) and Protected Adjusted PFL (paPFL) these deal with both new and pre-existing challenges. We provide a theoretical background and numerical examples.
New Economics Papers: this item is included in nep-cta, nep-rmg and nep-upt
Date: 2017-10, Revised 2018-11
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1710.03161
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