Counterparty Risk, Impacton Collateral Flows and Role for Central Counterparties

Counterparty Risk, Impacton Collateral Flows and Role for Central Counterparties

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Counterparty risk in the United States stemming from exposures to OTC derivatives payables (after netting) is now concentrated in five banks?Goldman Sachs, JPMorgan, Bank of America, Morgan Stanley and Citi. This note analyzes how such risks have shifted over the past year. We estimate that the adverse impact of counterparty risk on high-grade collateral flows and global liquidity due to decrease in rehypothecation, reduced securities lending, and hoarding of cash by major banks is at least $5 trillion. In order to mitigate counterparty risk, there have been regulatory initiatives to establish central counterparties (CCPs). From a policy perspective, counterparty risk remains large at present and recent experience has shown that OTC derivative positions are not supported by sufficient capital, constituting a major risk for participants in this market.There has been very little (if any) research that looks at the full gamut of the OTC derivatives market. Most of the recent discussion ... 3 Barclays Quantitative Credit Strategy Research Note: Counterparty risk in credit markets, February 20, 2008.


Title:Counterparty Risk, Impacton Collateral Flows and Role for Central Counterparties
Author: James Aitken, Mr. Manmohan Singh
Publisher:International Monetary Fund - 2009-08-01
ISBN-13:

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