Agenda How does J.P. Morgan manage counterparty risk? Group sessions How do you manage counterparty risk? What are your priorities? What are your biggest challenges? What is the right model? Review of findings
How does J.P. Morgan manage Counterparty Risk? Understanding the financial strength of banks… Two-pronged approach: Analysis of the Fundamentals (Quantitative) Overlay the Qualitative
How does J.P. Morgan manage Counterparty Risk? Analysis of the Fundamentals (Quantitative) Capital Assets Management Equity Liabilities and Liquidity
How does J.P. Morgan manage Counterparty Risk? Overlay the Qualitative: Diversity of earning streams Track record External Ratings Market Perception
How does J.P. Morgan manage Counterparty Risk? An evolving marketplace… Temporary support programmes rolling off: TARP TAGP Liquidity Fund Guarantees Government Ownership Increased regulatory oversight FSA liquidity requirements for banks Does your risk management strategy still make sense?
Sustaining liquidity management through the cycle How does J.P. Morgan manage Counterparty Risk?
The layers of credit risk: Counterparty concentration Core financial services provider choice; credit profile; core provider risk etc. Relationship strength; depth of understanding your business Regular assessment of counterparty risk profiles and comparison against risk preferences Opportunities to optimise cash held, classify appropriately, or invest and diversify to mitigate concentration risk Instrument type; fit to liquidity needs Changes to structure, risk profile or return profile Transparency of holdings Review assets against risk criteria: ―Cash accounts and time deposits ―money market mutual funds ―reverse repos ―direct securities investments Review other criteria e.g. jurisdiction Holdings and collateral; next level analysis Support, experience, track record and access Clear and complete investment policy ―ongoing inspection ―type, level and frequency of disclosure ―triggers for escalation or review Understand & Manage Risk Instrument choice and legal behaviour Investment quality - support and service quality Understand & Manage Risk Understand & Manage Risk How does J.P. Morgan manage Counterparty Risk?
Operating model: Effective and sustainable liquidity management requires a balance between: Capital Preservation Liquidity / Availability of Funds Convenience & Cost Return / Performance In addition, the balance must be achieved in compliance with the investment risk and currency risk management policies Management oversight and reporting are additional over-heads which must be organised to be efficient if practice is to be maintained long term Liquidity Management is not a ‘fair-weather activity’ or a ‘knee-jerk reaction’. It is a fundamental part of business
How does J.P. Morgan manage Counterparty Risk? In practice… COUNTERPARTY X