A weekly update on the latest “no-fluff” insight and analysis of the energy industry.
It is managed through various methods such as collateral requirements, credit limits, netting agreements, and using central counterparties (CCPs) for clearing trades. Financial institutions also conduct regular credit assessments and stress testing to monitor exposure.
CCPs act as intermediaries between buyers and sellers in financial markets, reducing counterparty risk by guaranteeing the performance of both sides of a transaction. They require margin deposits and perform daily mark-to-market valuations to ensure financial stability.
Derivatives (especially OTC derivatives), repurchase agreements (repos), and securities lending transactions are highly exposed to counterparty risk due to their complexity and reliance on bilateral agreements.
Yes, if a major financial institution defaults, it can trigger a chain reaction affecting other institutions and markets, leading to systemic risk. This was evident during the 2008 financial crisis when the collapse of Lehman Brothers disrupted global financial systems.
