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Risk-adjusted pricing is a matter of survival

Complexity Made Easy

Regulation and technology have made derivatives trading more complex than ever. Market conditions demand that trading and pricing must accurately reflect all risks — market, credit and liquidity. Capital intensive positions need to be identified, restructured, unwound or sold. Collateral and netting, now integral to all-in pricing, require optimization. A finite pool of liquid assets increasingly is driving hedging and capital usage decisions by banks. Credit models must improve to include collateral, liquidity, clearing and treasury impacts. Enter XVA.

What is XVA all-in pricing?

One of the main drivers for trading is the all-in price. This requires calculation of credit, debt, margin, funding and liquidity value adjustments — known as CVA, DVA, MVA, FVA, LVA respectively. Or collectively: XVA. The resulting all-in price reflects the fair value markto-market of each trade versus the existing portfolio. It enables accurate deal pricing, P&L, risk allocation, book running and funds transfer pricing per trade.

The number one problem in implementing XVA is data. Calypso Front Office delivers unified pricing, risk and collateral management for both CCP cleared and bilaterally settled trades — all on one platform.

Consistent pricing supports optimal risk-taking and hedging. It improves P&L accuracy and enables efficient allocation and usage of capital across business units.

Calypso is one platform. The front office works seamlessly with middle and back office to deliver efficient trading, risk management and processing across all asset classes.

Calypso Front Office performs XVA calculations across all major product types including FRAs, vanilla IR swaps, amortizing and CMS structures, FX forwards, crosscurrency swaps, swaptions, caps/floors and FX options.

Key risk functions include: Reporting at the level of the legal document Bucketed sensitivities for credit and interest rates Interest rate/credit and FX/credit cross-gammas Sensitivities for implied volatilities

• One cross-asset FTB platform for trading and risk • Full XVA incl. CVA, DVA , FVA, LVA, MVA • All-in pricing for cleared and bilateral • Eliminates fragile data feeds and complex synchronization • Pre-trade risk analytics • Near real-time performance

Calypso XVA-adjusted all-in pricing is delivered directly to sales and trading desktops in real time with complete integration to middle and back office. This enables responsive and informed trading decisions that leverage real-time connectivity to collateral, netting and margining. Pricing models and risk analytics are centrally managed and available throughout the system globally, eliminating problems of front office only pricing models in spreadsheets and standalone calculation engines.

Traders have the flexibility to combine XVA value adjustments inside Calypso in any permutation required in accordance with their risk policy including: Bilateral CVA FVA cost or benefit XVA by counterparty or legal document Real-time incremental XVA vs. existing portfolio Transfer pricing to the client

Calypso XVA Simulation

Calypso Front Office performs real-time incremental pricing against the pre-calculated portfolio. Simulations are performed on interest rate curves and FX rates using across-currency Libor Market Model. The Model takes as input calibrated swaption and FX volatilities, along with credit curves.

“

The business is benefitting from improved

operational efficiency, in the region of 60%, and speed of execution which has resulted in fewer errors, quicker response times and reduced operational costs.

”

Frédéric Coudreau Head of Capital Market Operations, Credit Agricole CIB

The simulations fully reflect any netting or collateral effects which result from CSAs or cleared margin agreements at portfolio, counterparty or trade level. The simulations produce all standard profiles with configurable time buckets and maturities.

Complex Data

Calypso Front Office supports full XVA book running functions from pricing, risk and collateral management including: Cross Asset P&L Greeks based hedging Trade capture screens for all hedges Trade blotters Position management Client credit curve construction methodology OIS discounting for IR and FX trades Netting, funding, basis and credit risk analytics Integrated collateral capability Initial Margin modelling Counterparty selection based on position offsets Pricing with mandatory breaks

Calypso’s single integral platform eliminates the need for interfacing or integration.

The Calypso XVA trading desk functions like any other trading desk monitored by Treasury and Risk. It operates as a price maker, running daily MTM and hedging activities.

All analytics are available on traders’ desktops and seamlessly interact with the Calypso database allowing interoperability with: Collateral inventory; Collateral legal agreements; Margin calls; Market data; Reference data; Transaction data.

Grid Computing

Calypso Front Office deploys calculation grid to enable massive real-time analytics computation on the entire portfolio. It employs off-the-shelf hardware making it a cost effective solution.

The Calypso Front Office solution runs on Calypso’s flexible and versatile cross-asset front-to-back platform — an adaptive enterprise infrastructure specifically designed to improve and evolve with changing markets. Clients benefit from a durable solution that delivers immediate improvements today and the ability to meet future business needs.

© 2014 Calypso Technology, Inc. All rights reserved. Calypso is a registered trademark of Calypso Technology, Inc., in the United States, European Union and other jurisdictions. All products and services referenced herein are either trademarks or registered trademarks of their respective companies