RiskTech Forum

Numerix: The Rise of xVA and How It Transformed an Entire Industry

Posted: 1 October 2017  |  Source: Numerix

In this article, Satyam Kancharla, Chief Strategy Officer at Numerix, brings to light the rapid growth and expansion of pricing and risk valuation adjustments in the financial industry. He addresses how xVA is now the posterchild for risk-informed decision making and the key to unlocking trade profitability across capital markets.

What historical event would we call the poster child for financial services risk management? The scandalous collapse of Enron in 2001, one of America’s largest corporations—and its largest corporate bankruptcy—at the time? Or before that, the horrific fall of Long-Term Capital Management in 1998, which jeopardized not only the biggest banks on Wall Street but the stability of the financial system itself? Or maybe, the 2000-2002 burst of the dot-com bubble, which resulted in the Nasdaq Composite losing 78% of its value? The world has experienced more than its fair share of macro-economic shocks, and I think it would be no surprise if I stipulated that the answer to my question is the 2008 financial crisis.

Because of its systemic economic impact, the crisis launched a swarm of changes for the financial industry, particularly regarding the clearing mandate and regulatory requirements that impacted enterprise risk management and front office trading operations. It goes without saying the focus was a crackdown on the systemic risk in derivatives, and the impact, almost ten years later, has been transformational for the industry. The mandatory changes fundamentally altered the context in which market participants made trading decisions, and delivered the realization that the new terms would take large amounts of time, effort and resources to implement.

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