The US$600 trillion global Over the Counter (OTC) derivatives market received widespread criticism for its complexity and opacity in the wake of the financial crisis – and as a result is facing a game-changing industry shake up.

As a result of the financial crisis, the ‘old’ derivatives valuation framework with one master swap curve for discounting and projection of forward rates no longer applies. In particular, the crisis revealed differences in value between collateralized and uncollateralized trades, which were negligible before. In order not to be arbitraged out, each institution must adjust its valuation approach to the current market practice.

Also IFRS 13, the new standard on fair valuation, provides a revised definition of fair value and related application guidance, as well as an extensive disclosure framework that needs to be applied.

In addition to that, the European Banking Authority (EBA) is working on Regulatory Technical Standards (RTS) laying out the requirements related to prudent valuation adjustments of fair valued positions. 

How can we help?

KPMG Advisory has developed Financial Instruments Services, in direct response to client requests, and is able to deliver the following services on a one-off or recurring basis:

Valuation framework

• Instrument valuation: An independent value of positions and financial instruments with a broad access to market information and pricing tools for many types of financial instruments, from plain vanilla to the most exotic ones 
• Pre-contract evaluation: Evaluate all aspects (risk, return, capital consumption, accounting and regulatory impacts) associated with new or proposed financial products.

Risk Management

• Market, credit and liquidity risk: Put in place a robust risk management framework where the different financial risks associated with financial instruments are adequately identified, measured, managed and controlled.

Accounting treatment

• Implementation hedge accounting: Develop hedge accounting strategies, leading practice hedge documentation and effectiveness testing models.

Training

• Tailor-made training on financial instruments accounting and valuation adjustments such as Credit/Debit Valuation Adjustments (CVA/DVA).