Course description
Credit, Liquidity and Counterparty Risk Management in Energy Trading is a one-day instructor led energy trading cours presented by the energy training experts at Mennta Energy Solutions. This 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: a laptop and up-to-date version of Office would be an advantage in order to engage in market data; however it is not essential.
Objectives
- Explore the various dimensions of liquidity and counterparty risk in the energy sector
- Understand key netting and collateral clauses in ISDA agreements
- How to perform Counterparty Valuation Adjustments (CVA) for energy derivatives
- Use of credit mitigation tools such as netting, collateral and credit derivatives in the energy sector
- Learn how to structure an internal rating system for derivatives counterparties
- Become familiar with simulation-based approaches to calculate potential future collateral (PFC), potential future exposure (PFE) and other risk metrics using Excel
- Understand how to set up a limit structure based on Current Exposures as well as Potential future exposures against various counterparties
- How to aggregate counterparty exposures using netting and collateral terms to provide a single unified view
- Set up effective credit and liquidity risk management policies and procedures for credit risk management including reserves and credit risk charges.
- Learn how ratings, indicators, and bond and CDS spreads price default risk
- Understand the impact of new OTC Derivatives regulations on liquidity and counterparty risk
Recent Updates and Case Studies
- Impact of European regulations on credit and liquidity risk: EMIR, REMIT and MiFID II
- Analysis of OW Bunker and Dynamic Oil Trading (Singapore) bankruptcy
- Credit default swap and bond market assessment of Glencore bankruptcy risk
- Defaults by oil and gas E&P firms and shipping companies in 2015
- Credit Valuation Adjustments by leading energy firms
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Content
Module I: 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
- Regulatory initiatives impacting OTC Derivatives Markets. Dodd-Frank, EMIR, REMIT and MiFID II
Module II: 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
Module III: Hedging Credit Risk. Netting, Collateral and ISDA agreements
- Credit Risk and Legal Risk
- Overview of the ISDA Master Agreement
- Netting and Offsets: Single, Cross-Product; Triangular
- Multilateral vs. bilateral netting
- Credit Support Annex (CSA): Collateral Thresholds, Independent Amounts, Rounding amounts and Minimum Transfer Amounts
- Use of Credit Default Swap (CDS) in energy markets
- Case study: CDS and bond market assessment of Glencore credit risk
Module IV: 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 Study: Valuation of a Commodity Swap with Credit-Risk adjusted curves
Module V: Counterparty Risk Policies and Procedures
- Counterparty risk management philosophy, policies vs. procedures
- 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
Seminar Wrap-up & Course Certificates