Counterparty Risk and How to Deal with It
Tom Van Dyck
Catholic University of Leuven (KUL)
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.
Number of Pages in PDF File: 16
Keywords: Financial crisis, Counterparty risk, Settlement Finality Directive, Collateral Directive, Derivatives, ISDA
Date posted: December 27, 2009