Risk management software firm Algorithmics said that it will work with Societe Generale Corporate & Investment Banking to develop a counterparty credit valuation adjustment product that SocGen can use to actively price and manage counterparty credit risk across all asset classes.

"Pricing and active management of counterparty risk are of critical importance to financial institutions and they place rigorous demands on CVA software for performance, real-time response time and front office 7X24 operations," says David Murphy, head of the CVA desk at SGCIB in a statement issued by Algorithmics on Thursday.

The deal with Algorithmics represents an extension of the French banking giant's relationship with the software vendor. SocGen was already using Algorithmics' market and credit risk software packages.

Credit valuation adjustment, otherwise known as CVA, is the  expected financial loss arising from the future default of a counterparty. Such an approach does not control counterparty risk through setting of exposure -- or trading limits. Instead, it puts a price on counterparty credit risk that can be charged to trading desks so they can accurately price their transactions in over-the-counter derivatives which are either uncollateralized or determined by the counterparties rather than a centralized clearinghouse. Many over-the-counter derivative deals between banks and corporations remain uncollateralized and processed bilaterally.

Algorithmics, recently purchased by IBM, will be installing its Algorthmics CVA Extension in SocGen's Paris office, where a centralized CVA desk is located, over 2012. Algorithmics, say company officials, will also be adding user interfaces to the CVA Extension software to allow SocGen's traders to calculate the CVA of their portfolios based on additional transactions with either the same or different counterparties. Those interfaces will be made available to other CVA Extension users in the future.

-- This article first appeared on Securities Technology Monitor.