Course Summary

This course covers the latest practical developments in credit and counterparty risk in energy and commodity markets. We will explore how to identify, quantify and mitigate credit and counterparty risk from derivatives and long term contracts. Case studies will illustrate practical applications based on gas, electricity and oil markets. We will review the critical components to establish sound credit risk management policies and procedures. Delegates will learn about applications of recent methodological developments such as counterparty potential future exposure and probability of default calculations. The course will also introduce applications of various counterparty risk mitigation tools such ISDA agreements (with emphasis on netting and collateral clauses), guarantees, and credit derivatives. This highly interactive workshop uses practical case studies, Excel exercises and group discussions to reinforce the concepts presented in the lectures. The workshop will focus on practical applications of various methodologies and tools to improve credit decisions.

What You Will Learn

• Explore the various dimensions of credit and counterparty risk in the energy sector
• Understand key netting and collateral clauses in ISDA agreements
• 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 calculations of expected exposure, potential future exposure (PFE) using Excel
• Understand how to set up a limit structure based on Current Exposures as well as Potential future exposures against various counterparties
• Aggregate credit exposures to provide a single unified view
• Learn how ratings, indicators, and bond and CDS spreads price default risk
• Set up effective credit risk management policies and procedures for credit risk management
• Numerous individual and group exercises to reinforce concepts presented in lectures

Please note: a laptop and up-to-date version of Microsoft Excel software is required in order to engage in market data (Excel 2003 or above).

8 CPE credits per training day awarded for this course.

Who Should Attend?

The course is targeted for people involved in counterparty and credit risk management for energy derivatives. The main groups involve risk managers (mostly from the credit/counterparty risk area), energy traders and trading managers, back office/operations, as well as legal, compliance and internal audit. Also people from IT department involved in implementing/supporting counterparty risk systems.

• Credit risk managers
• Risk managers
• Credit risk analysts
• Energy traders
• Trading managers
• Back office / collateral
• Internal audit
• IT specialists
• Legal and compliance
• Risk consultants

Course Contents

Module I: Overview of Credit Risk in Derivatives

• Credit and counterparty risk defined
• Credit risk vs. market risk
• Hedging credit risk vs. market
• Determinants of credit losses
• Liquidity considerations
• Type I vs. type II errors
• Market-based credit assessments: ratings, corporate bond spreads, and CDS spreads
• The Merton Model: KMV expected default frequencies
• Case study: default probabilities for various power trading firms after the Enron collapse

Module II: Credit Risk Assessment - Internal vs. External Credit Rating Systems

• Role of a rating system
• Rating systems and eligibility criteria
• Implied rating horizon. Point in time vs. through the cycle ratings.
• Rating process
• Credit transition matrices
• Credit watch and outlooks
• Internal rating systems: a top down approach for credit risk assessment
  • Country and event risk
  • Industry analysis and competitive position
  • Peer benchmarks. Case study from energy and commodity markets
  • Access to financial markets and bank financing
  • Management analysis
  • Assessing the quality of risk management: S&Ps PIM framework.

Module III: Financial Statement and Ratio Analysis

• Preliminary financial statement review
• The income statement
• The cash flow statement
  • Sources and uses of funds
  • Operations, investments and financing activities
  • Cash flow analysis and credit risk
• The balance sheet
• General guidelines in the use of ratios for credit risk assessment
• Balance sheet, liquidity, turnover and profitability
• Other considerations
  • Qualitative amendments
  • Group support
  • Financial data reliability
  • Warning signals and financial shenanigans
• Case study: Enron's internal rating system for counterparties

Module IV: Overview of Derivatives Payoffs and Mark-to-Market for Credit Risk Analysis

• Physical transactions: fixed price and index deals
• Forwards. Example: oil and gas forward contracts
• Swaps and basis swaps
• Exchange-traded options
• Exotic options
• Forward curves
• Mark-to-market process
• Interactive group Session: selecting derivative instruments consistent with price and volatility views

Module V: Hedging Credit Risk (I). Netting, Collateral and ISDA agreements

• Credit risk and legal risk
• 2002 ISDA(R) master agreement: review of main sections
• 2002 ISDA(R) schedule: review of main sections
• Netting and collateral explained
• Credit support annex: review of main sections
• Negotiation strategies
• ISDA(R) power annex; ISDA(R) gas annex and ISDA(R) bridge
• Material Adverse Clauses (MACs)
• Case study: MACs and forced sale of Constellation to Berkshire Hathaway (September 2008)
• Interactive group session: negotiation of key clauses on an ISDA contract

Module VI: Hedging Credit Risk. Credit Derivatives and other Risk Mitigants

• Key components in a credit derivative contract
• Credit Default Swap (CDS). Example
• Risk of credit derivatives
• Case study: Lehman Brothers credit derivatives settlement
• Other counterparty risk mitigants
• Interactive group discussion: stress tests for credit risk and use of CDS as a mitigation tools

Module VII: Linkages between Liquidity and Counterparty Risk Management

• Funding and trading liquidity risk
• Margin and liquidity risk: Hedger’s ruin
• S&P liquidity risk survey
• Market and credit stress tests for liquidity and counterparty risk
• Impact of credit crisis in the energy sector and financial counterparties
• Case study: MG. Amaranth
• Interactive group session: early warning system for firms with potential liquidity problems do to hedging activities

Module VIII: Overview of Credit Exposure Calculations

• Potential future exposure vs. expected exposure
• Exposure methodologies (static vs. simulation based methodologies)
• PFE profiles for derivatives
• Case study: PFE for a forward contract
• Case study: PFE for a commodity swap
• PFE for options: physical vs. financial settlement considerations
• Aggregation of exposures by counterparty
• Exposure aggregation with netting and collateral
• Counterparty limits based on potential future exposures
• Bank and parent company guarantees
• Interactive group session: charging for credit risk based on MtM vs. PFEs

Module IX: Credit and Counterparty Risk Policies and Procedures

• Credit risk management philosophy
• Policies vs. procedures
• Frequency of reviews
• Counterparty risk limits
• Acceptable credit enhancements
• Dealing with counterparty downgrades
• Dealing with limit excesses
• Charging for credit risk: alternative approaches
• Interactive group session: setting up an effective limit approval delegation process

The following course(s) are available..

Date / No of days	Location	Fee: Course only	Fee: + accommodation	Code
8 - 9 Dec 2010 (2)	London, UK	GBP£2600	- n/a -	CCRM\AGBR10