16 Pages Posted: 27 Dec 2009
Date Written: November 6, 2009
In this Discussion Paper it is argued that: (1) generally the existing counterparty risk protections have proved to be effective under very demanding conditions. In that context, the proposed piecemeal and “vertical” approach by the European Commission – whereby targeted corrections are made without demolishing the existing framework – can be applauded; and (2) on the other hand do the current proposals fail to take into account several important “horizontal” issues of counterparty risk: the main risks are not just about collateral to counterparties or derivatives with counterparties, but concern “size”, “complexity” and “risk management” – not of the counterparty but of both parties. The European Commission misses this point to the extent that its proposals fail to properly address these issues.
Keywords: Financial crisis, Counterparty risk, Settlement Finality Directive, Collateral Directive, Derivatives, ISDA
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