Potential Future Exposure Add-ons
Whilst the largest financial institutions have implemented sophisticated risk engines to calculate the Potential Future Exposure of their derivative portfolios many institutions do not have the volumes, complexity of transactions nor the resources to justify such an approach. For them, "mark to market plus add on" continues to be the most appropriate methodology.
Maintaining add-ons can still be an onerous task: they need to be regularly updated, need to adapt to business changes and take account of developments in modelling techniques.
Outsourcing add-ons calculations to InteDelta relieves the client of this burden, and provides the comfort of knowing that add-ons are calculated using the technology, models and data used by the largest financial institutions.
In the first instance, we will work with the client to design a structure of add-ons appropriate to its business and which can be supported by its risk systems. This may be as simple as replicating the structure currently in place. Or we can advise on a more appropriate structure for the add-ons. Clients are able to specify a number of quantitative parameters, such as the confidence level and choices of methodologies, used in the add-on calculation. Alternatively, clients can accept InteDelta’s standard policy for these parameters.
Once the add-on structure and policy have been agreed we will supply updated add-ons at the agreed frequency, usually quarterly or six-monthly. We provide a commentary which explains the changes in the add-ons from one period to the next and this can be provided to the client’s internal body that needs to approve the add-ons. Our add-ons cover the full range of products and underlyings: FX, interest rate, credit, equity and commodity. However, we only charge for the add-ons actually required. As business develops new products and underlyings can be easily added.
Where an organisation enters into more complex or structured transactions for which standardised PFE add-ons are not appropriate, clients may also wish to consider our outsourced transactional analysis service.
In addition to PFE add-ons, we can also provide Expected Positive Exposure add-ons for incorporation into expected loss and economic capital calculations.