Knowledge Transfer: The Exhausting Challenges of Managing Counterparty Risk
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Overview: As financial institutions search for answers to our current crisis, it is natural to be introspective about our business model, our core values, and the future of our industry. It was a shock to everyone in this business how quickly operational risk and market risk could lead to systemic risk. If there is a silver lining to this recession, it may come in the form of a commitment to address long-standing gaps in our infrastructure and governance. As part of this process, institutions are undertaking a rigorous assessment of all their business risks, including market, counterparty, credit, liquidity, legal and operational risk. Valuation risks associated with structured products and non-vanilla, over-the-counter (OTC) derivatives are clearly going to be a big focus from here on, but firms are also focusing intensely on the reduction of counterparty risk. High-profile credit failures, such as that of Lehman Brothers and the government of Iceland, coupled with the complexity of OTC instruments, have made counterparty risk a daily concern for market participants. Find out how firms can stay an armís length away from the ravaging effects of realized credit risks, while continuing to trade during times of extreme market volatility.