Presentation on theme: "This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered including."— Presentation transcript:
0COUNTERPARTY RISK MANAGEMENT IN AN EVOLVING MARKETPLACE Gerry Dorkin, Executive Director, J.P. MorganNovember 2009
2Agenda 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 findingsRun through the topics and questions at the end
3How does J.P. Morgan manage Counterparty Risk? Understanding the financial strength of banks…Two-pronged approach:Analysis of the Fundamentals (Quantitative)Overlay the Qualitative
4How does J.P. Morgan manage Counterparty Risk? Analysis of the Fundamentals (Quantitative)CapitalAssetsManagementEquityLiabilities and LiquiditySo obviously we’ve discussed rate volatility through the crisis but the issue here is that it continues.Interbank liquidity continues to be tight. Perception is everything.Northern Rock example. Who would have considered a household name UK Bank would have to be nationalised in the 21st century?Perception that the bank was in trouble drove investors to withdraw their cash in droves.Flight to Quality….ie not everyone takes the same view. The consistent theme across our clients is that there is no consistency….Flight to Transparency….exponential growth in liquidity funds as proactively addressed the need to provide transparency.
5How does J.P. Morgan manage Counterparty Risk? Overlay the Qualitative:Diversity of earning streamsTrack recordExternal RatingsMarket Perception
6How does J.P. Morgan manage Counterparty Risk? An evolving marketplace…Temporary support programmes rolling off:TARPTAGPLiquidity Fund GuaranteesGovernment OwnershipIncreased regulatory oversightFSA liquidity requirements for banksDoes your risk management strategy still make sense?
7Sustaining liquidity management through the cycle How does J.P. Morgan manage Counterparty Risk?Sustaining liquidity management through the cycle
8The layers of credit risk: How does J.P. Morgan manage Counterparty Risk?The layers of credit risk:Counterparty concentrationRegular assessment of counterparty risk profiles and comparison against risk preferencesOpportunities to optimise cash held, classify appropriately, or invest and diversify to mitigate concentration riskCore financial services provider choice; credit profile; core provider risk etc.Relationship strength; depth of understanding your businessUnderstand &Manage RiskInstrument choice and legal behaviourInstrument type; fit to liquidity needsChanges to structure, risk profile or return profileTransparency of holdingsReview assets against risk criteria:Cash accounts and time depositsmoney market mutual fundsreverse reposdirect securities investmentsReview other criteria e.g. jurisdictionUnderstand &Manage RiskInvestment quality - support and service qualityHoldings and collateral; next level analysisSupport, experience, track record and accessClear and complete investment policyongoing inspectiontype, level and frequency of disclosuretriggers for escalation or reviewUnderstand &Manage Risk
9How does J.P. Morgan manage Counterparty Risk? Operating model:Effective and sustainable liquidity management requires a balance between:Capital PreservationLiquidity / Availability of FundsConvenience & CostReturn / PerformanceIn addition, the balance must be achieved in compliance with the investment risk and currency risk management policiesManagement oversight and reporting are additional over-heads which must be organised to be efficient if practice is to be maintained long termLiquidity Management is not a ‘fair-weather activity’ or a ‘knee-jerk reaction’. It is a fundamental part of business
10How does J.P. Morgan manage Counterparty Risk? In practice…COUNTERPARTY X
11Group SessionMarket turmoil continues and the effect of Government intervention has yet to fully play out.Markets are no longer waiting for return to “normal” but to a new paradigm.Availability and cost of liquidity remains difficult.Volatility has enforced behaviour change;Investment guidelines.Diversification.Transparency and due diligence.Operational risk, not just counterparty/instrument risk.Increasing regulation brings extra requirements, but also opportunities.