In terms of counterparty credit risk, significant analysis is required to calculate the CVA of a counterparty position before and after moving trades to a CCP, and calculating the CCP specific initial margin requirements of bilateral trades must be considered in the context of the CSA agreement, which regulates the collateral of derivatives transactions. Beyond the direct impacts, there are complex interdependencies between CVA, funding costs and liquidity risk where greater collateralization can help to reduce counterparty risk, but can have an unintended negative impact on funding / liquidity risk. Banks need to be able to respond to margin calls from Commercial banks and efficiently serve customers.

Lastly, the management of customer portfolios must be addressed. Directly related to this are Banks treasury marketing units, a corporate clientele-focused unit, which strives to meet clients requirements and provide complex solutions. This units sales teams are spending too much time on operating processeslike double booking or calling to ask for quotesand face challenges in meeting regulatory reporting requirements.

INCREASED NEED FOR PRICING AND RISK ANALYTICS

MILSTE- Taiwanese banks clearly need to strengthen internal controls over sales of leveraged products. What types of tools should be looking at?

Cheng- As banks wish to remain competitive on a global scale they must simultaneously manage a range of complex issues underpinning an increased need for more sophisticated pricing and risk analytics. Banks need to consider better tools for optimized decision making. As a unified framework for deal-structuring, Credit Risk and Market Risk management, Numerix CrossAsset can be leveraged as part of an optimized collateral management strategy where operational costs, collateral costs and liquidity costs can all be coordinated within a single enterprise environment.

While pricing transparency is important they also require functionality that can manage the full trade lifecycle. A solution that can streamline this process enabling increased system interoperability and STP of derivatives products, bringing procedural consistency to the portfolio and valuation process.

EFFECTIVELY MANAGING CLIENTS TREASURY RISKS

O’Hanlon - Furthermore, banks need tools to differentiate the level of service they are able to offer to clients; enabling the bank to effectively manage their clients treasury risks, while enhancing operational efficiency, and making it easier to provide clients with best-in-class, superior service.

Leveraging scenario analysis and having the ability to analyze customer positions is also critical. Scenario analysis capabilities enables risk analysis and pre-announcementand also helps to meet regulatory requirements. It is necessary for banks to be better equipped to respond to the evolving needs of clients, and respond to cross-departmental needs and requests.

MILSTE- Indeed proprietary firms, pension funds, asset managers, and mutual funds will increase overseas derivatives trading in Taiwan. What type of risks will probably occur with Taiwanese banks?

O’Hanlon- Overall we see three key risks including operational risk, market risk and lack of transparency. In terms of operational risk, most of the buy sides are still managing these trades in excel this is a significant operational risk. In terms of market risk, these companies are exposed to FX/IR/EQ risks for doing all these derivatives. Lastly, these companies are only getting the statements on their derivatives portfolio from their banks on a weekly/bi-weekly or monthly basis. If there is a sudden change in the exchange rate or interest rate these companies will not have any transparency or information into the impact of these changes. Managing daily exposures without a proper tool or internal quantitative support is a serious risk.

AUTOMATION IS THE KEY TO MITIGATING RISKS

MILSTE- Taiwans regulator has been deregulation the market, which will mean more pension funds will be allowed to invest in overseas markets and derivatives markets. How will this impact Taiwans risks and what type of tools should they use to mitigate these risks?

Cheng -Besides pricing, in managing derivatives for their clients banks have no way to understand what exposures will be by currency, product and customer.

Automation will be a key way to mitigate risks, combine with other functionalities including: RFQ ( request for quote , MtM (market-to-market), Greeks, Cashflows, Fixings, Indicative term sheet, various customer advises, Portfolio management including scenario analysis, and trade life cycle management. Overall improving operational efficiency, and eliminating the need for double-booking will be key.

Moreover, when theres market turmoil, banks need to be able to generate a wide range of reports which can be sorted by customer, by product and by currency.

PnL reporting will help banks meet current regulatory requirements for very detailed PnL reporting. With this information readily available, customer modifications can be made as needed, and information can be reported quickly and efficiently to regulators. It enables comprehensive, accurate and timely regulatory reporting.

Knock-in/Knock-out reports will enable sales to communicate actively with their customers when they have deals that are going to be knocked-outin addition to enabling them to actively provide other investment suggestions. With other enhanced reporting capabilities, like FX Ladder reports, users are able to generate scenario analysis by changes in different percentage of FX rate. In addition, this report can also be sorted by product, by customer, by currency pair and more.

With this functionality, banks can actively communicate with customers about what their portfolio looks like, and provide comprehensive scenario analysis.

SOPHISTICATED ANALYTICS IN TAIWANS DERIVATIVE MARKET

MILSTE- What is the future of Taiwans derivative market?

O’Hanlon- The Taiwanese derivatives market is one of the largest in Asia. A large amount of corporates and individual investors are leveraging these products to meet their needs, therefore increasing volume. In addition to increased processes for risk management and independent pricing, well continue to see more sophisticated technologies and analytics being used in these areas.

Also, as banks are not seeing the same level of profits from traditional methods they will be investing in the capital markets business. As such, we might begin to see customers wanting to become market makers, and in turn they will be looking to get the proper infrastructure in place.