Counterparty credit risk: Lessons from recent events

Andreas Ita
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Andreas Ita: Managing Partner, Orbit36 Risk Finance Solutions AG, Switzerland

Journal of Risk Management in Financial Institutions, 2023, vol. 16, issue 3, 256-272

Abstract: This paper looks at the lessons learned for risk management from two recent events, the default of Archegos Capital Management in March 2021 and the unusually large price jumps in energy markets in summer 2022. The paper finds that the counterparty exposure from margined derivatives transactions exceeded the required initial margin significantly in both cases, so that the exposures were largely uncollateralised when it mattered. In addition, the standardised approach for counterparty credit risk (SA-CCR) resulted in regulatory capital requirements which were insufficient to cover the banks' losses from the unwinding of large and concentrated derivatives exposures. This made it difficult, even for some large banks, to identify the high loss potential of the transactions with a single client.

Keywords: risk management; derivatives; collateral; standardised approach for counterparty credit risk (SA-CCR); initial margin; Archegos; energy markets (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2023:v:16:i:3:p:256-272

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