Restructuring counterparty credit risk

Claudio Albanese, Damiano Brigo and Frank Oertel

No 14/2013, Discussion Papers from Deutsche Bundesbank

Abstract: We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and DVA). Depending on how the default contingency is accounted for, we list a total of ten different structuring styles. These include bi-partite structures between a bank and a counterparty, tri-partite structures with one margin lender in addition, quadripartite structures with two margin lenders and, most importantly, configurations where all derivative transactions are cleared through a central counterparty (CCP). We compare the various structuring styles under a number of criteria including consistency from an accounting standpoint, counterparty risk hedgeability, numerical complexity, transaction portability upon default, induced behaviour and macro-economic impact of the implied wealth allocation.

Keywords: counterparty credit risk; CVA; DVA; margin lending; securitisation; Basel III; CCP; clearing; collateral; OTC (search for similar items in EconPapers)
JEL-codes: C51 C54 C63 E51 G01 G32 G33 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: RESTRUCTURING COUNTERPARTY CREDIT RISK (2013)
Working Paper: Restructuring Counterparty Credit Risk (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:142013

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