Auditing and validating asset liability management models

Credit default products are structured so that a payout occurs only when a pre-defined credit event (or one of several such events) occurs.

Credit events will normally include bankruptcy, liquidation and any payment default on the reference asset, but may also include lesser events such as rescheduling or rating downgrades.

A financial liability is the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.

A contract in which two counterparties agree on the interest rate to be paid on a notional deposit of specified maturity at a specific future time.

For the present banks may adopt approaches that capitalise different risks differently (eg via an add-on approach), provided that this can be undertaken conservatively and it does not undermine the strength of risk management.

Specifically, a bank must exclude from the correlation trading portfolio any SPV-issued instrument backed, directly or indirectly, by a position that would itself be excluded if held by the bank directly.Normally, no principal exchanges are involved, and the differences between the contracted rate and the prevailing rate is settled in cash.Terms that are used interchangeably when describing the counterparty who is providing the protection against a potential default or taking on the risk of an asset they do not own by agreeing to make payment upon a credit event.Government-sponsored agencies, multilateral development banks, and banks are defined in Chapter 3 – Credit Risk – Standardized Approach.Instruments issued by banks should meet the ratings criteria listed in paragraph 65 and should originate from a BCBS-member country or country that has implemented BCBS-equivalent standards.

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