Specialized Mortgage Bank:
Quaternion’s client, a specialized Mortgage Bank, was approached by a double-digit number of large Dealer counterparties. The counterparties were seeking to restructure their CSA agreements and to engage in compensation negotiations, in particular with respect to an implicit collateral interest rate floor of 0%, so the focus of the calculations lay on the Collateral Value Adjustment (ColVA). The Mortgage Bank’s portfolio totaled one thousand Swaps, Cross Currency Swaps and Bermudan Swaptions. To support their renegotiation efforts, the client required verification that the compensation offered by counterparties was fair. Quaternion’s support led to a very successful renegotiation of the client’s CSA portfolios. The proprietary software solution installed by Quaternion and used for the CSA valuation calculations, ORE+, is still in use by the client to project and plan expected collateral flows for liquidity management.
European Restructuring Bank:
Quaternion’s client, a European Restructuring Bank, with a large outstanding variation margin (double digit billion EUR) was approached by many large Dealer counterparties that were seeking to restructure their old-style CSA agreements offering compensation payments. The portfolio contained several thousand Swaps, FX Swaps, Bermudan Swaptions, Inﬂation Swaps, BMA Swaps, CDS, and numerous types of structured products. Through the client’s mandate to rapidly reduce assets while maximizing portfolio value, the client sought this opportunity to monetize the “in the money” features of its CSAs, the most dominant of which was the collateral interest rate floor (ColVA calculation). The client required verification that the compensation offered by the counterparties was indeed fair. The compensation negotiated was based on the simulated floor value during the remaining life of all trades and ranged in the order of triple digit million EUR across all portfolios.
European Supranational Bank:
Quaternion’ s client intended to switch from one-sided CSAs (where only the counterparty posts collateral as part of the variation margin process) to two-sided CSAs (where both parties post collateral). Because of the one-sided nature of legacy CSAs, it could be expected that the switch would results in a benefit for the counterparty and a moderate cost for the client. For the renegotiation it was important to be aware of all relevant value drivers that could potentially contribute to the counterparty’s economic benefit and of their order of magnitude.
Quaternion implemented, based on the proprietary software ORE+, a methodology that calculated potentially relevant key value adjustments, i.e. CVA, FVA, KVA quantifying the impact of the CSA changes on credit risk, capital cost and funding cost. Moreover, Quaternion also calculated the impact of the nature of the collateral (Bonds vs. Cash) on the underlying primary valuation of the netting set (COLVA). This enabled the client to argue magnitude and nature of portfolio value shifts during the renegotiation process facing off against large Dealer Banks.