Counterparty Trading Limits Revisited: CSAs, IM, SwapAgent®, from PFE to PFL

Shortened version in Risk, Forthcoming

14 Pages Posted: 10 Oct 2017 Last revised: 25 Nov 2018

See all articles by Chris Kenyon

Chris Kenyon

MUFG Securities EMEA plc

Mourad Berrahoui

Lloyds Banking Group

Benjamin Poncet

Lloyds Banking Group

Date Written: November 23, 2018

Abstract

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.

Keywords: PFE, exposure, CVA,initial margin, IM, SwapAgent, trading limits, capital

JEL Classification: K23, G11, G12, G13, G21, G24, E37, D81, D82, D52, D40, C15

Suggested Citation

Kenyon, Chris and Berrahoui, Mourad and Poncet, Benjamin, Counterparty Trading Limits Revisited: CSAs, IM, SwapAgent®, from PFE to PFL (November 23, 2018). Shortened version in Risk, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3049974 or http://dx.doi.org/10.2139/ssrn.3049974

Chris Kenyon (Contact Author)

MUFG Securities EMEA plc ( email )

25 Ropemaker St
London, EC2Y 9AJ
United Kingdom

Mourad Berrahoui

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

Benjamin Poncet

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

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