ACI Suite of Diplomas

Transcription

1 ACI Suite of Diplomas LAUNCH DATE: 1 st of March 2016 Only available at ACI Diploma in Foreign Exchange (Code 014) ACI Diploma in Fixed Income and Money Markets (Code 015) ACI Diploma in Asset, Liability and Risk Management (Code 016) ACI Diploma in Advanced Derivatives (Code 017) Effective Rue du Mail, Paris - France T: F:

2 Contents: Introduction. 3 Diploma 1: Foreign Exchange & FX Options - Syllabus. 5 - Scoring...12 Diploma 2: Fixed Income & Money Markets - Syllabus 13 - Scoring.21 Diploma 3: Asset, Liability & Risk Management - Syllabus 22 - Scoring.30 Diploma 4: Advanced Derivatives - Syllabus 31 - Scoring.38 ACI-The Financial Markets Association, February

3 INTRODUCTION Structure The new ACI Suite of Diplomas is comprised of several modules covering core topics of the global financial markets. Diploma 1: Foreign Exchange & FX Options, Diploma 2: Fixed Income & Money Markets, Diploma 3: Asset, Liability & Risk Management, Diploma 4: Advanced Derivatives. Diplomas 5 8 will be launched consecutively in the future. In order to be awarded the ACI Diploma a candidate must pass one Diploma examination and meet the eligibility criteria. Objective and Target Group The new ACI Suite of Diplomas builds on the ACI Dealing Certificate and the ACI Operations Certificate as well as on the ACI Model Code exam. It is designed to ensure that candidates acquire a deep theoretical and practical knowledge of financial markets with emphasis on currency, interest rate and credit derivative instruments, and the linkages that exist between those markets and risk management. It stresses the importance of best practice and market conduct in addition to technical skills. Candidates are expected to have acquired a solid grounding in the core subject areas and have the requisite skills in financial mathematics prior to matriculating for the Diploma. ACI-The Financial Markets Association, February

4 The ACI Suite of Diplomas is designed for the following groups: Senior foreign exchange and money market dealers Currency, interest rate and credit derivatives traders and risk managers Corporate, institutional and bank treasurers Senior operations staff (middle office and back office) Professional investors and hedge fund managers Risk controllers (market risk and model validation) Portfolio managers Asset-liability managers Eligibility In order to become eligible for one of the new ACI Diplomas you either need to be a holder of the ACI Dealing Certificate or the ACI Operations Certificate or the ACI Model Code Certificate. Examination In each Diploma exam a candidate will be asked 90 multiple choice test questions to be answered in four hours. The computer based exams will be offered in selected test centres all over the world. The test centres and the way of exam registration will be published on the ACI website. Exam preparation Candidates will prepare for the Diploma exams via class-room training. Various training companies and business schools will offer preparatory courses. These courses will be published on ACI s website; please follow the updates. ACI-The Financial Markets Association, February

5 ACI Diploma in Foreign Exchange (Code 014) Foreign Exchange & FX Options Overall Objective Candidates confidently deal with FX spot, swap and forward transactions, currency options, using bid-offer spreads, recognize arbitrage-relationships, collateralization, structure and price simple strategies and understand the basics of standardized exotic options (in the sense of the ISDA Definitions). Candidates will conduct option valuation and interpret risk management figures. A focus will be on understanding the meaning of hedge sensitivities (Greeks) in the context of trading and risk management, the relationships among these Greeks and Greeks of higher order. Candidates will be able to structure risk management solutions for corporate treasury using vanilla and basic exotic options as their building blocks; these exotic options include mainly barrier, touch, digital options as well as variance and volatility swaps. Part of the working knowledge in FX options will include the FX volatility smile for vanilla options and apply vanilla structures to manage the risk of changing volatility and shape of the smile surface. Candidates will be able to judge which combination of products cause which type of risk for different client types. Learning Objectives Know: Candidates should be able to recall what they have learned Understand: Candidates should be able to demonstrate comprehension on what they have learned Apply: Candidates should be able to use what they have learned to achieve an accurate result Analyse: Candidates should be able to review content and make an informed decision and draw conclusions Evaluate: Candidates should be able to extract meaning from what they have learned ACI-The Financial Markets Association, February

6 Topic Basket 1 FX Spot, FX Forward Outright and Swaps, Cross Rates, Forward- Forwards, NDF, Time Options Understand basis FX principles like currencies, currency pairs, FX spot, market liquidity, and currency trading constraints; tom-next, forward and swap transactions and relationships to interest rates. Understand the fundamental FX products and explain the strategies underlying their use: Know the difference between matched-principal and unmatched-principal FX swaps with respect to having an open position or not; Understand forward-forward FX swaps and explain the strategies underlying their use; Understand how FX swap traders can take a position; Understand an NDF and explain its rationale. Apply principles of modern FX trading Apply and calculate cross rates; Apply the correct choice of spot rate in an unmatched principal swap; Apply a roll over a spot FX position with tom/next FX swaps, calculate the costs or benefits involved, and identify the risks involved; Analyse and calculate the impact of a change in the spot rate on the price of an FX swap; Apply and calculate the price of a forward-forward swap; Apply and calculate a two-way FX cross-rate spot, outright and swap quotation; Apply and calculate both sides of the theoretical swap points from an FX spot rate and the bid and offer quotes for the interest rates; Apply and calculate an FX swap over today and over tom for regular and odd periods including cross rates involving CAD; Analyse a time option/flexi forward and price one from outright forward rates or swap rates; Analyse and choose settlement rates for any short date swap and forward-forward swap. ACI-The Financial Markets Association, February

7 Topic Basket 2 Valuation and Hedging of FX Positions and Arbitrage Opportunities Show solid working knowledge in fundamental risk management applied to the hedging of FX positions: Understand the mechanics of calculating the tail risk, hedge the tail risk with spot or outright for a given matched principal swap, understand how tail risk influences the FX result; Apply and calculate the spot-risk hedge necessary for a forward FX position; Understand the hedging of a forward-forward position using FRAs and/or futures. Understand and evaluate interest arbitrage opportunities. Understand and be able to apply basic valuation concepts of FX positions, in particular the following applications Understand which yield curves are used for valuation and discounting: Money market, OIS, EURIBOR; Apply, identify and calculate the effect of changes in the interest differential on the value of an FX swap position; Apply and calculate the cost of borrowing or lending through FX swaps Evaluate the effect on the price of an FX swap in case of a roll-over a forward FX position at a historic rate; Apply and calculate profits or losses of forward-forward FX swap positions; Evaluate the profit or loss on a spot FX position on T+1 for given revaluation rates; Apply and calculate the profit or loss on an FX swap position for given revaluation rates; Apply and calculate the profit or loss on an outright forward FX position at given revaluation rates. Analyse how a synthetic FRA can be created by using forward-forward FX swaps and another FRA; apply and calculate the profit & loss results of this strategy depending on the market swap rate at settlement. ACI-The Financial Markets Association, February

8 Topic Basket 3 Fundamentals of FX Options and Pricing with Black and Scholes Understand the meaning of and be able to define basis FX Option principles like Understand exercise features, exercise styles (European vs. American), deemed exercise and their impact on the value of an option; Understand the concept of a currency option; Understand the relevance of cut-offs and fixings; Understand the relevance of volatility; Know: deferred delivery, cash-settlement, American and Bermudan exercise rights, cut-offs and fixings. Understand basis concepts and show solid working knowledge in fundamentals of FX Options: Apply FX specific put-call parity and put-call symmetry to pricing and hedging currency options; Know price quotations and conventions; Understand how to convert from percentage to pips and amounts and vice versa; Understand the conventions of options priced with implied volatility; Understand and apply put-call parity and synthetic forwards; Understand the difference between an outright forward and a synthetic forward; Know the relevant dates of a currency option: trade day, premium payment day, exercise/expiration time, settlement day; Know settlement types; Understand and explain the impact of settlement type on counterparty risk; Know how historic volatility is calculated; Analyse implied and historic volatility; Apply and convert volatility for different terms; Understand the difference of smile format versus Brokers quotes: risk reversal, 2-vol-strangle vs. 1-vol-strangle, vega-weighted butterfly. Understand and be able to apply basic valuation concepts of FX Options: Understand the concept of Black-Scholes / Merton / Garman-Kohlhagen model in FX; Understand the model assumptions and where they fail in practice. Show solid working knowledge in the valuation of FX Options Analyse the impact of exercise style on the price of the option; Evaluate the effect of bid-offer spreads quoted in implied volatility depending on the term and the moneyness of vanilla options; Understand and quantify the risk for a trader in cash-settled options with a reference to a fixing. ACI-The Financial Markets Association, February

9 Topic Basket 4 Structuring with Plain Vanilla Options Show solid working knowledge in the Structuring with Plain Vanilla Options Analyse the missing leg of a given structure; Evaluate the building blocks of a risk reversal and participating forward; Evaluate the building blocks of spreads, ratio spreads, seagulls, straddles, strangles, butterflies and condors; Apply and calculate the result (final exchange rate) of these strategies at the maturity date; Apply and choose between versions of these for hedgers and/or traders; Evaluate the structure to use in which situation and to hedge which type of risk; Understand and be able to apply basic concepts of Structuring with Plain Vanilla Options Understand how to extend the concept of risk reversals and participating forwards to more general strategies; Understand how the strategies of building blocks are used by corporates from an importer/exporter point of view; Understand the relevance of the underlying cash-flow in structured forwards; Understand the impact of the sales margin of a zero-cost structure on the strike prices of the component options; Understand the difference between the bid offer spreads of structures and the bid offer spreads of the component options; Understand how dual currency and other FX-linked deposits and loans are composed by their building blocks; Evaluate the prices of each building block and the price of the structure; Understand how to unwind a dual currency deposit; Understand how structured forwards are composed by their building blocks. Understand the concepts and show solid working knowledge in the context of structured products Apply delta and vega hedging of structured products; Understand the impact of the smile effect on structured products; Evaluate how the sales margin is derived from the value of a strategy from either the seller s or the buyer s point of view; Know the risk for the sell-side and the buy-side of a dual currency deposit; Evaluate sales margin in structured products; Analyse the final exchange rate for all structures from a treasurer s point of view as a function and in a diagram; Apply the idea and calculate the worst case exchange rates for the different hedging strategies; Evaluate the final exchange rates in structured forwards. ACI-The Financial Markets Association, February

10 Topic Basket 5 Greeks and Hedging Understand Greeks and Hedging principles for FX products Understand the importance of Greeks; Know delta, gamma, theta, base currency and counter currency rho, vega; Understand the relationship between gamma and theta; Know Forward volatility. Understand the concepts and show solid working knowledge in the context of Greeks and Hedging applied to FX products Apply and calculate the impact of the market value of a position using Greeks (mathematical derivatives vs. amounts) in a trading context; Analyse the delta hedge required for a portfolio of bought and sold options including the currencies and amounts; Evaluate examples of options for a given set of signs of Greeks; Evaluate the Greeks of a portfolio of options; Apply the smile quotation conventions in FX respecting the ATM and delta-conventions; Understand the difference between spot and forward delta, and between premium-adjusted and premium-unadjusted delta; Analyse the quotation of option prices in terms of deltas; Apply volatility smile: define term-structure, skew, risk reversals and butterflies; Analyse the conversion between quotations in terms of delta and quotations in terms of risk reversals and butterflies; Evaluate forward volatility from spot volatilities; Apply and calculate vega hedging to options for given term and deltas; Evaluate the number of at-the-money straddles required to vega hedge a given option position; Know the basic strategies for hedging volatility risk. ACI-The Financial Markets Association, February

11 Topic Basket 6 Standardized Exotic Options Know the ISDA Supplements 2005 for barrier options and 2013 for variance and volatility swaps. Understand the functionality of and be able to handle Standardized Exotic Options Know exotic features: deferred payment, contingent payment; Understand digital options: European and American style, single and double barrier; Understand barrier options: single and double, knock-in and knock-out, transatlantic, kick-in/kick-outs, knock-in-knock-out barrier options; Understand structured forwards without worst case such as knock-out forward; Understand the product feature and risk of a variance swap; Understand the difference between variance swaps and volatility swaps. Understand the concepts and show solid working knowledge in the context of Exotic Options Analyse digitals paying domestic currency and digitals paying foreign currency; Evaluate the risk of selling digital options; Understand the relationship between digital options and spreads of vanilla options; Evaluate the risk of barrier options for the buy-side and the sell-side; Analyse simple structures, in particular a multi-leg vanilla strategy or a structured forward with worst case such as a forward extra using vanilla and barrier options); Apply the idea of a semi-static hedge of a variance swap with a portfolio of vanilla options; Analyse why other than the variance swap the volatility swap cannot be hedged with a portfolio of vanilla options. Understand and be able to apply basic concepts of the valuation of Exotic Options Apply the rule of thumb of pricing American style digital options (onetouch/no-touch) based on European style digital options; Evaluate the impact of jump-risk on the value of a variance swap; ACI-The Financial Markets Association, February

12 Examination Procedure Format: The examination lasts 4 hours (240 minutes) and consists of 90 multiplechoice questions. Calculators: Some questions will require the use of a calculator. It will be provided on the computer screen. Score criteria: The overall pass level is 60% (54 correct answers), assuming that the minimum score criteria of 50% for each of the topic baskets is met. Topic basket criteria # Topic basket FX Spot, FX Forward Outright and Swaps, Cross Rates, Forward- Forwards, NDF, Time Options Valuation and Hedging of FX Positions and Arbitrage Opportunities Fundamentals of FX Options and Pricing with Black and Scholes Topic weight Number of questions Minimum score Correct answers 24.5% 22 50% % 20 50% % 12 50% 6 4 Structuring with Plain Vanilla Options 13.3% 12 50% 6 5 Greeks and Hedging 13.3% 12 50% 6 6 Standardized Exotic Options 13.3% 12 50% 6 Total 100% 90 Grades Pass Merit Distinction 60% % (54 62 correct answers) 70% % (63 71 correct answers) 80% and above (72 correct answers and more) Examination Fee Unit EUR, all taxes included. ACI members will get a 20 % discount if national ACI association confirms local or global membership. ACI-The Financial Markets Association, February

13 ACI Diploma in Fixed Income and Money Markets (Code 015) Fixed Income & Money Markets Overall Objective The objective of this unit is to understand the historical evolution and central functions of fixed income & money markets and its related financial derivatives and to acquire a broad range of practical skills such as: how to apply derivatives in Hedging and Asset & Liability Management and manage spot and forward FX positions, how to apply interest swaps in managing interest rate risk and how to value structured interest products. In addition, candidates are taught to exploit fixed income instruments and understand their interrelationships. They will learn the relevant pricing mechanisms, and display a good working knowledge and understanding of the rationale for various special kinds of interest rate contracts including interest rate options. Candidates understand Fixed Income derivatives pricing, hedging, risk management, applications in treasury and derivatives documentation and regulation. A focus will be on Interest Rate Swaps, Swaptions, Caps and Floors, Exotic Options, structured products, and inflation related products, taking into account common pricing platforms. For this kind of derivatives candidates will be able to use risk management quantities (Sensitivities) to gauge the risk in a portfolio of Fixed Income products. Learning Objectives Know: Candidates should be able to recall what they have learned Understand: Candidates should be able to demonstrate comprehension on what they have learned Apply: Candidates should be able to use what they have learned to achieve an accurate result Analyse: Candidates should be able to review content and make an informed decision and draw conclusions Evaluate: Candidates should be able to extract meaning from what they have learned ACI-The Financial Markets Association, February

14 Topic Basket 1 Advanced Money Market Understand the principles of the money market Understand the principal comparative advantages and disadvantages of each of the main types of cash money market instruments for typical borrowers/issuers and lenders/investors; Understand the benefits of the programmed issuance of money market securities. Know the conventions of the money market and evaluate the fundamental financial instruments Understand the features and conventions of CPs, CDs and T-Bills and perform the related calculations; Evaluate the holding period yield between the purchase and the sale of a CD or a T-Bill; Understand the principal reasons for the spreads between the yields on the different types of instruments; Understand the credit ratings used by the main agencies for short-term instruments from longer-term ratings; Understand the precise specifications of the most commonly used overnight indexes (OI); Understand the main reasons why initial margin is taken in repo, define margin threshold and minimum transfer amounts; Evaluate the start proceeds of a repo using the concept of the Margin Ratio in ICMA repo documentation and a variety of collateral; Understand the difference between calculation using initial margin and calculation using a haircut; Understand the purpose of margin maintenance and calculate the margin call on a repo; Understand the early termination and re-pricing method used in sell/buy backs as an alternative to margining and calculate the payments or transfers due using this method; Understand why counterparty risk is the primary concern in repo and understand the risks introduced by the use of collateral; Understand the working of tri-party repo; Understand how rights of substitution work in repo; Understand the main reasons why collateral goes on special and calculate the implied securities lending fee from the repo rate on specials; Understand the importance of the GMRA and list its main features; Understand how to identify GC from the ICMA list; Evaluate the forward price of a sell/buy-back and recognize this as the forward price of the collateral; Know an open repo, repo-to-maturity and forward repo; ACI-The Financial Markets Association, February

15 Understand how to construct a synthetic repo and recognize the difference in price levels between real and synthetic repos; Evaluate the break-even on a forward interest rate position partly derived from covered interest rate arbitrage using a US T-Bill; Apply the conversion from the discount rate to the true yield; Apply the impact of negative interest rates in all cases. Topic Basket 2 Fixed Income Understand the fundamental principles of Fixed income markets Understand the characteristics and benchmarks of different Fixed Income markets; Understand the syndication process and the roles of relevant relationships; Understand the relevant characteristics of the global bond markets, especially government, corporate, and high yield bond markets, including the relationship between the investor base and yields. Understand basic concepts and show solid working knowledge in Fixed Income securities Understand the differences between different types of Fixed Income securities and their characteristics, recognize their basic features and designate their main applications in managing, diversifying and hedging of classic banking book exposures; Understand the basic techniques of valuation and return analysis for Fixed Income instruments from different sectors, industries and companies; Analyse the structural characteristics of different debt financing alternatives and Mezzanine instruments, and characterize the common features in debt contracts, including covenants; Apply the concepts of Yield to Maturity (YTM) or Internal Rate of Return (IRR); Apply and calculate the inter-relationships between cash interest rates, forward rates and zero-coupon rates; Apply and calculate bond pricing relative to benchmark bonds and curves; Analyse bond risks based on Duration and Modification Duration, Convexity and Basis Point Value. ACI-The Financial Markets Association, February

16 Topic Basket 3 Non-Option Interest Rate Derivatives Apply the pricing techniques for bond futures and forward contracts, taking into consideration Contract specifications and conversion factors; The expiration of futures contracts; Cheapest to Deliver Bonds; Gross and net basis; The dynamics of rolls; Bond valuations on the basis of futures; Understand the following applications of Futures Contracts; Applications in strategic asset allocation; Interest rate risk management; Relative value trading; Hedging Swaps; Cash and carry arbitrage; Spread trading. Understand the fundamental principles of the non-option interest rate derivative market Know the most important roles and functions in the derivative markets like dealer, broker, broker-dealer and interdealer brokers; Understand the role of the ISDA and relevant documents like master agreements and credit support annexes; Know the key elements of an ISDA Master Agreement, mechanics of collateralized deal, collateral rate, distinguish between secured vs. unsecured transactions; Understand the market infrastructure, including electronic trading platforms; Evaluate the impacts on Global Market Infrastructures caused by Basel III, MIFID II, EMIR, MIFIR, Dodd Franck, etc., especially: Central clearing counterparties, Trade repositories, Organized trading facilities. Understand basic concepts and show solid working knowledge in non-option interest rate derivatives Understand important Benchmark Curves like ISDAfix; Evaluate the role of swaps as primary instrument in the interest rate derivatives market, and their applications for pricing and hedging more complex instruments; Evaluate the implications of the post-crisis update of the swap curve, and of multi-curve-modelling and understand overnight index swaps and their role for valuation purpose; Apply and calculate the effective rate of a combination of fixed income instruments and interest rate swaps taking into account differences in day-count conventions and payment frequencies; Define a forward money market yield curve and explain the relationship between forward curves and the cash yield curve; ACI-The Financial Markets Association, February

17 Apply and calculate the exact cost of borrowing or return on lending that is hedged with an FRA; Evaluate the three types of basis between money market futures prices and other rates; Understand how to compensate for the basis using the concept of convergence when hedging with futures; Evaluate the bid and offer price of IMM FRAs and swaps from futures strips and explain how to use a strip of futures to price non-imm periods; Evaluate the hedging ratio on non-imm periods hedged with futures using simple hedging techniques and the numbers of contracts needed; Evaluate calculate the hedge ratio for futures hedges, adjusting for mismatches between the underlying term of the contract and the term of the transaction being hedged; Understand the structure and purpose of strip and stack futures hedges; Understand the structure and purpose of calendar spreads and other common types of futures spread strategies, and calculate the profit or loss on such trades; Understand how to use futures spread trades to hedge the basis risk on futures hedges of non-imm periods; Understand the usefulness of the volume and open interest statistics on a futures contract; Evaluate open interest and volume; Apply techniques to identify arbitrage opportunities between FRAs, money market futures and money market swaps; Evaluate the problem of the convexity bias between futures and OTC derivatives like FRAs and swaps; Understand how FRAs, futures and swaps can be used to hedge and arbitrage against each other; Apply the impact of negative interest rates in all cases; Understand the concept of overnight index swaps; Know the conventions for OIS market in USD, EUR, JPY, GBP, CHF; Understand the basis between OIS curves and IRS curves as being the credit/liquidity spread for different terms; Evaluate the cash and forward basis between OIS curves and IRS curves against LIBOR/EURIBOR for different terms; Apply and calculate the settlement amount for terms up to one week; Understand how overnight index swaps are used for valuation; Apply and calculate the pricing methodology of forward starting swaps; Understand the forward swap grid; Understand the mechanism of basis swaps; Analyse how a cross currency swap can be hedged by a basis swap and one or more interest rate swaps; Know the pricing of basis swaps; Understand mechanics of Overnight Indexed Swaps, relation between OIS and collateralization. Understand the following structures: Asset swaps, Libor in arrears swaps, Constant maturity swaps, Amortizing, accreting and rollercoaster swaps, Forward start swaps. Analyse the impact of the yield curve on the price of these structures. ACI-The Financial Markets Association, February

18 Topic Basket 4 Plain Vanilla Interest Rate Options Understand the different Plain Vanilla IR option products Know Options on futures; Understand the concept and conventions of swaptions; Understand the role of forward starting swaps as underlying instruments of Swaptions; Analyse the differences between payer and receiver Swaptions; Understand the concept of cancellable Bermudan-style IRS. Understand basic concepts and show solid working knowledge in the valuation of Plain Vanilla IR options Evaluate the role of the LIBOR-Market Model for pricing Swaptions; Understand the terms and conditions of Interest Rate Guarantees caplets and floorlets; Understand the composition of Caps and Floors as strips of caplets and floorlets; Understand the composition of a collar including zero cost structures; Evaluate the impact of the forward curve on the strike levels of a zero cost collar; Understand quoting methods in the cap and floor markets; Understand the Black 76 approach for pricing caps and floors; Apply and calculate hedging and pricing of caps, floors and collars from options on STIR futures. ACI-The Financial Markets Association, February

19 Topic Basket 5 Exotic Interest Options & Structured Products Understand the different Exotic IR options and structured products Apply hedging strategies of more exotic structures bases on Swaptions; Analyse important Structured Products with embedded Swaptions; Analyse important structured products with embedded caps and floors. Understand basic concepts and show solid working knowledge in the valuation of Exotic IR options and structured products Analyse the relationships of dynamics of the interest rate curve, curve expectations and structured products; Understand the method of Factor analysis of the interest rate curve; Understand the objectives of modelling the term structure of interest rates; Evaluate forward curves, curve expectations and their impact on the following structures: Capped Floater, Reverse Floater, Callable bonds, Range Accruals, Libor-in-arrears, CMS floater, Structured Products linked to Overnight Index Swaps; Understand how the above structures could be hedged; Apply combining short-term interest rate swaps with barrier options; Apply combining long-term interest rate swaps with series of digital options; Understand the different valuation approaches for structured interest products: Short Rate Models, HJM-Framework, Market Models. ACI-The Financial Markets Association, February

20 Topic Basket 6 Credit Derivatives Understand the functionality and conventions of different Credit Derivatives Understand the basic terms of a credit default swap including the relevant ISDA-definitions : Credit events Physical settlement versus cash Settlement Reference Obligation versus Deliverable Obligations Understand Credit indices (itraxx and DJCDX), CDOs and Basket Default Swaps. Understand the fundamental principles of the credit derivative market Evaluate the main applications of Credit Derivatives, i.e. to Reduce/hedge credit risk, Actively take certain credit risks, Generate extra returns, Set up tailor made structured credit risk profiles, Generate synthetic bonds/loans that are not available in the market in this form (time to maturity, currency, etc.). Understand arbitrage relationships of Credit Default Swaps and Asset Swaps and the CDS-Basis; Understand the main lessons from the credit crisis: Big bang and Small Bang protocols, Quoting standards and standardized pricing, Standardization of CDS contracts, Determination of occurrence of credit event by the Determination Committee. Show solid working knowledge in the field of credit derivatives Understand the structuring principles of credit-linked notes; Apply and calculate market implied default probabilities based on CDS curves; Apply mark-to-market valuation principles for CDS contracts; Apply trading strategies with CDS: Curve trades, Capital structure trades, Long-short trades, Relative value arbitrage, Role of CDS in convertible arbitrage, Credit versus equity arbitrage. ACI-The Financial Markets Association, February

21 Examination Procedure Format: The examination lasts 4 hours (240 minutes) and consists of 90 multiplechoice questions. Calculators: Some questions will require the use of a calculator. It will be provided on the computer screen. Score criteria: The overall pass level is 60% (54 correct answers), assuming that the minimum score criteria of 50% for each of the topic baskets is met. Topic basket criteria # Topic basket Topic weight Number of questions Minimum score Correct answers 1 Advanced Money Market 20.0% 18 50% 9 2 Fixed Income 20.0% 18 50% 9 3 Non-Option Interest Rate Derivatives 26.7% 24 50% 12 4 Plain Vanilla Interest Rate Options 11.1% 10 50% 5 5 Exotic Interest Rate Options & Structured Products 11.1% 10 50% 5 6 Credit Derivatives 11.1% 10 50% 5 Total 100% 90 Grades Pass Merit Distinction 60% % (54 62 correct answers) 70% % (63 71 correct answers) 80% and above (72 correct answers and more) Examination Fee Unit EUR, all taxes included. ACI members will get a 20 % discount if national ACI association confirms local or global membership. ACI-The Financial Markets Association, February

22 ACI Diploma in Asset, Liability and Risk Management (Code 016) Asset, Liability and Risk Management Overall Objective Asset Liability Management (ALM) is Banking Book Risk Management. ALM covers liquidity, interest rate risk in the banking book, the treatment of forex exposures arising from banking book positions as well as any and all structural issues of bank balance sheet management including a high level perspective on credit risk. ACI Diploma holders should understand the fundamental challenges of banking book management in commercial banks and other retail lenders. These include the behavioural risks and embedded optionalities in client assets and liabilities that may impact the liquidity, interest rate risk and forex profile of the institution. Solid knowledge of long-term funding opportunities, capital adequacy, regulatory constraints and supervisory review expectations vis-à-vis internal risk management practices will also be covered. With this appreciation of the underlying issues in ALM, ACI Diploma holders will be in a position to structure derivatives, propose hedging strategies and devise other balance sheet management solutions for retail banking counterparties and in-house business lines. Learning Objectives Know: Candidates should be able to recall what they have learned Understand: Candidates should be able to demonstrate comprehension on what they have learned Apply: Candidates should be able to use what they have learned to achieve an accurate result Analyse: Candidates should be able to review content and make an informed decision and draw conclusions Evaluate: Candidates should be able to extract meaning from what they have learned ACI-The Financial Markets Association, February

23 Topic Basket 1 Fundamentals of Asset & Liability Management Know how to define Asset Liability Management, identify its scope and enumerate the main practical challenges in managing classic banking book exposures. Understand the typical organization and governance of ALM practice: the role of the Risk Management, Treasury, ALM Department and various executive and board committees. Understand how risk tolerance is determined at governance level and translated into appropriate policies, processes and controls. Understand and explain the role of ALM in terms of business development, strategic planning, long-term funding, capital management, the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). Know how to position Treasury, i.e. the transactional dimension of ALM, as a distinct business unit (profit centre) and identify its internal and external clients / counterparties and primary sources of revenue. Apply the organizational principles of ALM and analyse how ALM interacts with credit risk at the portfolio level (concentrations, capital adequacy, stress testing). Understand the evolving regulatory guidance issued by the Basel Committee on Banking Supervision (BCBS) and national financial sector authorities. Successful candidates will retain the essential directives put forward by the following source documents: BCBS: Core Principles for Effective Banking Supervision, 2012; BCBS: Principles for Enhancing Corporate Governance, 2010; BCBS: Basel II - International Convergence of Capital Measurement and Capital Standards, with a focus on Pillar 2: Supervisory Review and ICAAP; BCBS: Principles for Sound Stress Testing Practices and Supervision, 2009; BCBS: Basel III - A global regulatory framework for more resilient banks and banking systems, revised June 2011; US: Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 including the Volcker Rule. ACI-The Financial Markets Association, February

24 Understand the emerging regulation of the OTC derivatives markets post the global financial crisis: Markets in Financial Instruments Directive/Regulation (MiFID II/ MiFIR). Topic Basket 2 Interest Rate Risk in the Banking Book Understand the principles of interest rate risk in the banking book Know how to define interest rate risk in the banking book and identify underlying sources and drivers of interest rate exposure (repricing, yield curve effects, basis risk, optionalities); Understand the market requirements for suitable rate references and potential problems related to using traditional money market panels; Understand the imperfections of a duration hedge; Understand the evolving regulatory guidance issued by the Basel Committee on Banking Supervision (BCBS) and national financial sector authorities. Successful candidates will retain the essential directives put forward by the following source documents: BCBS: Principles for the Management and Supervision of Interest Rate Risk, Apply techniques to measure and deal with interest rate risk Apply the classic tools of interest and time value of money analysis: yield, yield curves (definitions, calculation and estimation), net present value, modified duration, basis point value and convexity; Understand the fundamental approaches to interest rate risk measurement: static versus dynamic, near-term earnings perspective versus economic value; Analyse the data inputs, interpretation and model limitations of the following basic rate risk analyses: Repricing Gap (static, evolution), Duration Gap, Modified Duration of Equity, Cash flow mapping and contract-by-contract NPV Balance Sheet, Dynamic rate risk simulation and stress testing, Value at Risk (VaR) and banking book interest rate sensitivity. Apply advanced models and extensions for interest rate risk measurement that may accommodate the following complex challenges: Embedded options models (caps & floors, callability, commitments), Retail credit prepayment behaviour, ACI-The Financial Markets Association, February

25 Non-maturity (revolving) assets and liabilities: re-pricing and prolongation behaviour of retail demand and term deposits, untilfurther-notice assets etc. Apply and calculate the change in market value of a interest bearing portfolio given a modified duration and an interest rate scenario; Apply and calculate the appropriate duration hedge given the relevant modified duration. Apply principles of modern fund transfer pricing (FTP) to practical ALM issues: Basic logic of fund transfer pricing system, ALM / Treasury as profit centres in a FTP system, Market-based funds transfer pricing curves and necessary adjustments / fine-tuning, Pricing empirical / behavioural elements in retail assets and liabilities, e.g. replicating schedules of retail deposits, Managing interest rate risk in a decentralized branch organization with FTP incentives. Apply the accounting principles governing the recognition and valuation of financial instruments as per IAS 39 and IFRS 9 Financial instruments: Presentation (IAS 32), Disclosures (IFRS 7), Recognition and Measurement (IAS 39); IAS 39: fair value and impairment; IAS 39: Classification of financial assets (Loans & Receivables, Fair Value through PL, Held-to-Maturity, Available for Sale, Derivatives); IAS 39: Fair Value Option and practical fair value issues; IAS 39: Hedge accounting; IFRS 9: objectives, structure, implementation, transition, changes & options versus IAS 39. Topic Basket 3 Forex Exposures in the Banking Book Understand the principles of forex exposures in the banking book Understand the sources of client-driven forex exposures in retail and commercial banking; Know the fundamental drivers of exchange rate developments (i.e. balance of payments, monetary and fiscal policies, macroeconomic indicators); Understand non-traditional forex risk: transfer and convertibility risk, currency induced credit risk and macroeconomic stress scenarios; Understand how multicurrency retail operations are integrated into the funds transfer pricing framework. ACI-The Financial Markets Association, February

26 Understand and show solid working knowledge in the context of forex positions Structure and evaluate traditional forex instruments for managing banking book exposures and macro forex hedges; Evaluate management strategies for hedging currency risk on future Profit & Loss; Analyse the benefits, risks and prudential implications of structural forex positions and equity hedges in local currency environments with structural devaluation bias; Evaluate exposure measurement (open positions, VaR, holding periods etc.) and limit setting in respect to banking book forex positions. Topic Basket 4 Liquidity Management Understand the concepts of Liquidity Management: Analyse Liquidity Management practices and analytical tools in large decentralized financial institutions: Cash flow planning, Modelling behavioural elements in credit demand and the utilization of revolving facilities, Analytical framework for retail deposit supply behaviour, Liquidity stress testing and liquidity gaps, Understand the concept of Basel III liquidity measures and requirements, i.e. LCR and NSFR as well as the broader context of the ILAAP, Analyse bank funding instruments and strategies: Fundamentals of central bank monetary policy instruments and operations, Non-conventional monetary policy instruments devised by ECB and Federal Reserve, HKMA, MAS, Japan and their impact on bank balance sheets: zero-rate policies, quantitative easing, long-term financing operations (LTRO). Apply solid working knowledge in the context of Liquidity Management Apply and calculate the LCR and NSFR given selected balance-sheet items, weightings and stress scenarios; Understand High Quality Liquid Assets (HQLA), repo-eligibility and asset encumbrance; Apply the principles of collateral management with respect to central bank repos, interbank secured money market transactions and the collateral requirements of various central counterparty and exchange platforms; Analyse and advise counterparties on the basics of the prudential treatment of structured investments and securitizations (capital adequacy, liquidity, repo-eligibility). ACI-The Financial Markets Association, February

27 Understand the evolving regulatory guidance issued by the Basel Committee on Banking Supervision (BCBS) and national financial sector authorities. Successful candidates will retain the essential directives put forward by the following source documents: BCBS: Principles for Sound Liquidity Risk Management and Supervision, 2008; BCBS: Basel III - International framework for liquidity risk measurement, standards and monitoring, 2010; UK FSA: Policy Statement 09/16 Strengthening Liquidity Standards, Know Funding instruments: The future of senior unsecured bank issuance, Securitizations and covered bonds, OTC and exchange traded repo markets, Traditional unsecured money market, certificate of deposit and commercial paper; Evaluate trading strategies in instruments qualifying as HQLA for retail bank counterparties. Topic Basket 5 Credit Risk Understand the principles of credit risk Understand credit and counterparty risk and explain the underlying factors determining the incidence of annual credit portfolio losses (EL = PD*EAD*LGD); Understand the difference between expected loss and unexpected loss; Understand the capital requirements for derivatives; Understand the basics of the prudential capital adequacy treatment of banking book credit exposures (Basel Accord, Standardized Approach, Internal Ratings Based approaches); Know the definitions and modern regulatory approaches to settlement risk and counterparty credit risk: rollover risk, general and specific wrong-way risk, credit valuation adjustments (CVAs), credit conversion factors. Show solid working knowledge in the context of credit risk Know how the bank charges the counterparty for the costs of expected and unexpected loss; Know the properties of an annual portfolio loss distribution and the subadditivity of credit risk in diversified portfolios; Evaluate how credit risk should be priced in a Risk-Adjusted Return on Capital (RAROC) approach; Analyse the instruments, contracts and trading practices giving rise to counterparty credit risk and settlement exposures. ACI-The Financial Markets Association, February

28 Understand the emerging regulation of the OTC derivatives markets post the global financial crisis: Group of Twenty (G20) Sep 2009 initiative, Dodd-Frank Act 2010, move to central counterparty clearing of traditional OTC derivatives; European Market Infrastructure Regulation (EMIR). BCBS / IOSCO proposals for bilateral margining of non-centrally cleared OTC derivatives. Basics of Credit Value Adjustment (CVA) on credit-risky counterparties and Debt Valuation Adjustment (DVA) that incorporates the cost of one s own default imposed by counterparties. Distinguish between payment netting, netting by novation and close-out & set-off; Explain the working of a central clearing counterparty (CCP). Topic Basket 6 Market Risk Evaluate Interest Rate Risk management strategies in the banking book in the context of: IAS 39 Fair Value of financial instruments, the Fair Value Option The basics of IAS39 / IFRS 9 hedge accounting Using OTC derivatives and exchange traded instruments for the purposes of macro hedging strategies for interest rate risk exposures in the banking book. Understand the principles of market risk Know the definition of risk capital, explain its role in covering unexpected losses, distinguish between economic and regulatory risk capita; Evaluate capital requirements for spot and forward FX, cash money market instruments, FRAs, and money market futures and swaps transacted with OECD central governments, OECD banks and corporates under the Basel II Accord and, in the case of repo under Basel rules; Understand the roles of stress testing and back testing. Understand the regulatory requirements concerning market risk Understand the evolving regulatory guidance issued by the Basel Committee on Banking Supervision (BCBS) and national financial sector authorities. Successful candidates will retain the essential directives put forward by the following source documents: BCBS: Basel 2.5 -Enhancements to the Basel II Framework, 2009 BCBS: Revisions to the Basel II Market Risk Framework, 2009 Understand the purpose of the Basel Committee and outline the architecture of the Basel rules. Understand different approaches to measure market risk and show solid working knowledge Understand the differences between parametric (statistical) and nonparametric measures of risk, and between the main non-parametric methods, and explain when each approach is appropriate; ACI-The Financial Markets Association, February

29 Know value-at-risk (VaR); Understand the key assumptions in a VaR calculation (holding period, observation period and confidence interval); Understand the key assumptions underlying VaR (randomness, linearity and normal market conditions) calculate the VaR of a single future cashflow; Understand the difference between undiversified and diversified VaR; Know Volatility calculations: convert volatility between an annualised basis and higher frequencies, etc.; Know the different types of market risk (Interest Rate, Equity, Currency, Commodity); Understand the Limitations of VaR; Understand the concept of Expected Shortfall; Understand quantitative techniques (Loss Distributions, Variance- Covariance Method, Historical Simulation, Monte Carlo); Evaluate different limit structures in the dealing room. ACI-The Financial Markets Association, February

30 Examination Procedure Format: The examination lasts 4 hours (240 minutes) and consists of 90 multiplechoice questions. Calculators: Some questions will require the use of a calculator. It will be provided on the computer screen. Score criteria: The overall pass level is 60% (54 correct answers), assuming that the minimum score criteria of 50% for each of the topic baskets is met. Topic basket criteria # Topic basket Topic weight Number of questions Minimum score Correct answers 1 2 Fundamentals of Asset & Liability Management Interest Rate Risk in the Banking Book 17.8% 16 50% % 18 50% 9 3 Forex Exposures in the Banking Book 11.1% 10 50% 5 4 Liquidity Management 20.0% 18 50% 9 5 Credit Risk 11.1% 10 50% 5 6 Market Risk 20.0% 18 50% 9 Total 100% 90 Grades Pass Merit Distinction 60% % (54 62 correct answers) 70% % (63 71 correct answers) 80% and above (72 correct answers and more) Examination Fee Unit EUR, all taxes included. ACI members will get a 20 % discount if national ACI association confirms local or global membership. ACI-The Financial Markets Association, February