Quote Platform Syndicate Inc.

Description

Will The Counterparty-Systemic-Risk Relationship Undermine Banks? Price-makers seeking above-average profits in the OTC derivatives marketplace invariably find themselves entering arenas which defy consensus risk assessments: thinly traded foreign currencies, extended contract maturities, non-existent benchmark instruments, variable contractual terms, multi-jurisdictional exposure and diverse counterparties. One component of risk in OTC trades lies in fluctuating at-liquidation prices. But it is the second component, broadly termed "counterparty risk", which continues to defy quantification. Price-related risks on bank balance sheets are disclosed on the basis of fair value measurements (SFAS-157). But counterparty risk assessments are rarely debated. "This is a slippery slope involving any number of local and foreign participants, the overwhelming majority of whom are unrated," a Wall Street treasury head recently conceded to the writer. "The more you dig into counterparty risk, the more you stray into the bizarre arena of systemic risk." Bizzare?

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