Course description
This virtual instructor-led course provides a comprehensive overview of credit, liquidity and counterparty risk management in energy trading.
We will explore how to identify, quantify and mitigate credit and counterparty risk from derivatives and long term contracts. Case studies will illustrate the interaction of market, credit and funding liquidity risk with numerous examples from energy market participants. The course will also cover the critical components to establish sound liquidity and credit risk management policies and procedures.
Delegates will conduct hands-on exercises to implement credit and liquidity risk metrics such as Potential Future Collateral (PFC) and counterparty potential future exposure (PFE), as well as Credit Valuation Adjustments (CVA) in fair value calculations.
The course will also introduce applications of various counterparty risk mitigation tools such ISDA agreements, with emphasis on the Credit Support Annex (CSA) and collateral implications. Netting, guarantees, and credit derivatives will also be covered.
This highly interactive workshop uses up-to-date practical case studies, Excel exercises and group discussions to reinforce and consolidate the concepts presented in the lectures.
Please note: an up-to-date version of Microsoft Excel is required in order to engage in market data.
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Content
Virtual Instructor-Led Session 1: 3 hours
101: Overview of Counterparty Risk and Liquidity Risk in Derivatives
- Funding Liquidity and Counterparty Risk
- Expected Losses: Exposures, Recovery Rates and Probability of default
- Mark to Market, Margin, Collateral and Clearing
- Integrated approach to model Counterparty and Liquidity Exposures
- Group exercise: Interaction between Market Risk, Liquidity Risk and Counterparty Risk
102: Credit Risk Assessment – Internal vs. External Credit Rating Systems
- Role of a rating system
- Market-based Credit Assessments: Ratings, Corporate Bond Spreads, and CDS spreads.
- Rating agencies methodologies for energy firms
- Credit Watches and Outlooks
- Case study: Moody’s Ratings and Default probabilities
- Internal Rating Systems: A Top Down Approach for Credit Risk Assessment
- Case Study: Analysis of an internal rating system of an energy trading firm
- Case study: Approval process for non-rated counterparties
Virtual Instructor-Led Session 2: 3 hours
201: Hedging Credit Risk. Netting, Collateral and ISDA agreements
- Credit Risk and Legal Risk
- Overview of the ISDA Master Agreement
- Credit Support Annex (CSA): Collateral Thresholds, Independent Amounts
- Netting and Offsets: Single, Cross-Product; Triangular
- Multilateral vs. bilateral netting
- Non-performance risk and liquidated damages: Failure to delivery or failure to receive
202: Credit risk mitigation tools
- Letter of credit: Types and main uses in energy trading
- Parent guarantees: Types and main uses
- Trade and receivables insurance
- Debt covenants and collateral triggers
- Adequate assurance (AA) and Material adverse change clauses (MACs)
- Use of Credit Default Swap (CDS) in energy markets
- Case study: CDS and bond market assessment of Glencore credit risk
Virtual Instructor-Led Session 3: 3 hours
301: Counterparty Risk Policies and Procedures
- Counterparty risk management philosophy, policies vs. procedures
- Setting up a limit structure
- Case study: Counterparty risk policies and reports by US utilities
- Traditional exposure-based counterparty risk limits: Uses and limitations
- Creating and Communicating Collateral position and Exposure reports
- Pricing credit risk and liquidity risk into deals
- Credit Risk charges and reserves: Alternative Approaches
302: Overview of credit exposure and potential collateral Calculations
- Exposure Metrics
- Simulation of spot and forward prices
- Potential Future Exposure (PFE) vs. Potential Collateral at Risk (PFC)
- Case Study: PFE and PFC for a Physical Forward and Commodity Swap contract in Excel
- Impact of Netting and Collateral Thresholds in PFE calculations
- Group exercise: Enhancing a credit limit system with potential exposure metrics
- Credit Valuation Adjustments (CVA) and debt valuation adjustments (DVA)
Case Studies
- Impact of Covid-19 on credit markets
- PG&E bankruptcy
- Chesapeake and oil and gas E&P bankruptcies