Structured Credit and Derivative Tranaction Review - PwC · PDF fileStructured Credit and...
6
Banking and Capital Markets Structured Credit and Derivative Transaction Reviews
Transcript of Structured Credit and Derivative Tranaction Review - PwC · PDF fileStructured Credit and...
Banking and Capital Markets
Structured Credit andDerivative Transaction Reviews
The PricewaterhouseCoopers EuropeanStructured Finance Group (the ‘ESFG’)can provide you with a range of serviceswhich are designed to help ensure thatthe structured finance and complexderivative contracts you hold areappropriately captured by your financialand risk systems.
Structured Credit andDerivative Transaction Reviews PricewaterhouseCoopers
1
The recent market conditionsand volatility in the capitalmarkets has lead to significantwrite downs on structured creditand other complex derivatives.This environment has placedsignificant stress on banks’structured credit books, in somecases; this has given rise toconcerns over thecompleteness and accuracy ofthe trade bookings andassociated valuations. Forsome banks, this has alsoresulted in material operationalissues being identified.
Who we are
The ESFG, part of the GlobalStructured Finance Group atPricewaterhouseCoopers, is adedicated team of securitisationand structured finance specialistsbased in London and all majorEuropean countries. The groupoffers a wide range of services toinvestment banks who would liketo gain assurance that there are‘no surprises’ in their holdings ofstructured credit and derivativetransactions.
ESFG provides independentadvice and practical solutionsusing a multi-disciplined team ofcapital markets, corporate finance,accounting, tax, IT and industryexperts who specialise instructured finance andsecuritisations.
Structured credit transactionreviews
Recent reviews of structured creditand derivatives books performedby the ESFG have allowed us todevelop unparalleled expertise inidentifying errors and anomalies instructured credit transactions,structured notes and exoticderivative positions, which weleverage for the benefit of ourclients.
With the developments in thecredit derivative and structuredcredit market in the late 1990’sthere was significant productinnovation, while systems, controlsand legal documents struggled tokeep up.
Structured Credit and DerivativeTransaction Reviews
2 Structured Credit andDerivative Transaction Reviews PricewaterhouseCoopers
It is not at all uncommon in these types ofbooks for transactions to be ‘forced’ into thesystems and for certain elements of thetransactions to be either monitored off line ornot booked on the grounds of materiality, atthe time of booking.
With the recent turmoil in the global creditmarkets some of these ‘off line’ terms arenow critical to the valuation of thetransactions and there have been numeroushigh profile write offs in relation to suchissues.
Typical issues
We have identified a wide range of issueson other reviews, and their underlyingcauses, and we understand the widerimpacts of issues arising. We use thisexperience to rapidly target, identify andassess key risk areas, and determine theimplications on the broader transactionpopulation.
The matters we normally focus our reviewson include:
Booking and other related issues instructured credit and complextransaction portfolios
Valuation issues and themes instructured and complex transactions
Root causes of key issues
Our approach
We agree an approach that fits with the riskprofile, but typically the review will beleveraged to identify and review high riskareas first, and provide a lower level ofassurance based on sampling, to widerpopulations of lower risk transactions. Thisallows our clients to benefit from our
experience of risk identification,whilst also managing the overallcosts of the review.
Stratification
We stratify the trades into groups,and assign a preliminary risk ratingto each group of similar trades.This allows us to prioritise thereview order, based on identifyingsub-groups of transactions withsimilar risk profiles, we can thenagree a detailed approach whichwill give you the level of comfortrequired.
Higher risk assessments
We would typically focus most ofour efforts on transactionsidentified as being of higher risk.We review all documentation indetail, capturing key terms andcontractual provisions. We thenconsider the transactions facts asspecified in the documentation inrelation to our understanding of thetransaction type and its economicsand capture the key risks fromeach transaction and identify areasof particular focus.
Booking processes
We understand the bookingprocess for each type of trade andconfirm that all key components ofthe trades have been captured andreflected in the appropriateaccounting, valuation and riskmanagement systems, ensuringthat the relevant financial and riskreporting occurs and can bemonitored.
Valuations
We have found that in respect ofvaluation models the issue is notnecessarily the mechanics of themodels, but the completeness ofthe model in relation to thetransaction specific inputs andrisks the model is actuallymodelling. Other issues commonlyidentified are infrequency ofupdates to, and lack of backtesting of, the assumptions used.
We also provide independentremodelling services where modelintegrity has been identified as asignificant risk.
Reporting findings
We document for each transactionor group of similar transactions, asappropriate, a summary of the keytrade characteristics, thedocuments reviewed, key risksidentified and any issues arisingfrom the booking review.
Lower risk transactions
This process would then berepeated for the lower risktransactions, or groups of similartransactions, employing samplingmethodology where appropriate,allowing the cost of the review tobe managed against the level ofrisk in a population.
Structured Credit andDerivative Transaction Reviews PricewaterhouseCoopers
3
Sharing issues identified
We believe that a successful outcome ofsuch reviews requires real ownership ofissues by the client and we structure thehandover of the issues in a process thatincludes feedback processes to shareunderstanding.
Overarching processes andcoordination cross border
These reviews often require working crossborder, whether because of differentlocations of the structuring teams, or thefront and middle office. Throughout thesereviews we use our proven approach to workeffectively across different locations and acentral project management office willprovide direction, alongside a team whichhas experience of working on such crossborder reviews.
About the Global Structured FinanceGroup
The Global Structured Finance Group atPricewaterhouseCoopers brings together aunique blend of individuals from the areas ofstructuring, securitisation, corporate finance,tax, accounting and capital markets in everymajor European country, working closelywith our US and Asia Pacific teams. Theteam includes individuals who have workedin structured finance front offices. We canbring to bear detailed knowledge ofindividual industries and expertise in specifictypes of asset pools, based on our extensivecorporate client base. We work closely withother specialist teams within the firm,including the Financial Services RegulatoryPractice, the European and US ListingsGroups and the Receivables ManagementGroup, which provides standby servicerarrangements and liquidation services.
About the EuropeanStructured Finance Group
By creating the ESFG in 2000,PricewaterhouseCoopershighlighted its commitment toprovide securitisation andstructured finance services to itsUK and Continental Europeanclients. Our objective is to providea comprehensive range ofstructured finance andsecuritisation services includingfeasibility studies, operational andinfrastructure reviews, collateralanalysis, structuring advice, pre-closing and post-closing servicesby using experienced specialistsdrawn from across our Europeanpractice.
Effective and timely delivery ofthese products has enabled ESFGto establish itself as a major playerin the UK and the rest of Europe.ESFG comprises individuals withexpertise in a variety of functionalspecialties, including capitalmarkets, investment banking,transaction consulting, tax andaccounting. The combination ofleveraging this skill set withconsiderable transactionexperience enables the group tooffer a well-rounded service to ourclients.
Contacts
Peter JeffreyPricewaterhouseCoopers (Europe)+44 (0) 207 804 [email protected]
Frank SerravalliPricewaterhouseCoopers (USA)+1 646 471 [email protected]
James HewerPricewaterhouseCoopers (UK)+44 (0) 207 804 9605Email: [email protected]
Peter FlickPricewaterhouseCoopers (Germany)+49 69 9585 [email protected]
Mike ByrnePricewaterhouseCoopers (Jersey)[email protected]+44 1534 838278
Paul LandyPricewaterhouseCoopers (Netherlands)[email protected]+31 (0) 20 5684284
Anik ChaumartinPricewaterhouseCoopers (France)+33 (0) 01 5657 [email protected]
Michael CodlingPricewaterhouseCoopers (Australia)+61 2 8266 [email protected]
David LukachPricewaterhouseCoopers (USA)+1 646 471 [email protected]
Guenter SimonPricewaterhouseCoopers (Luxembourg)[email protected]+352 (0) 494 848 2375
Mark TraceyPricewaterhouseCoopers (Portugal)[email protected]+351 213599316
Alain LattafiPricewaterhouseCoopers (Switzerland)[email protected]+41 (0) 58 792 9433
Padraic JoycePricewaterhouseCoopers (Ireland)+353 (0) 1 792 [email protected]
www.pwc.comThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not actupon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) isgiven as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision basedon it.
© 2009 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liabilitypartnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network,each of which is a separate and independent legal entity.
Designed by Design & Production, FS, Assurance (24745)
