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Counterparty Credit Risk: The new challenge for global financial markets by Jon Gregory

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Chapter 15

The Future of Counterparty Risk

At the time of writing, counterparty risk is one of the hottest topics within the financial markets with much interest around aspects such as collateral management, credit value adjustments (CVAs) and central counterparties. The credit derivatives market is in a state of flux with opinion divided somewhat between whether the underlying instruments represent important risk transfer and hedging tools or are simply dangerous weapons that will serve only to cause future disturbances within the financial markets. Many institutions are trying to recover from the crisis and improve profitability and capital ratios whilst at the same time beginning to consider what steps need to be taken to avoid being so heavily exposed to the next major financial disturbance. There is much research and discussion around the precise causes and catalysts of the credit crisis and debate and inquisition will probably continue for years.

Whilst the future of counterparty risk is likely to be changing significantly in the coming months and years, we will attempt to summarise briefly some of the key areas for development and improvement.

15.1 A COUNTERPARTY RISK REVOLUTION?

In the mid-1990s, market risk experienced a revolution due to the VAR concept together with regulatory rules around calculation of market risk capital using internal models. It is perhaps time for counterparty risk to experience a similar revolution. As we have argued several times, counterparty ...

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