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ERIC Number: ED559302
Record Type: Non-Journal
Publication Date: 2012-Nov
Pages: 20
Abstractor: ERIC
Reference Count: N/A
Managing Counterparty Risk in an Unstable Financial System
Belmont, David
Commonfund Institute
The recent flow of headlines excoriating bankers and financiers for malfeasance, fraud, and collusion has been almost biblical in proportion. Counterparties that appeared creditworthy based on financial statements and ratings have revealed that they are impaired either due to computer errors, control failures, malfeasance, or potential regulatory liabilities. In sequential scandals, financial institutions disclosed that they had dramatically violated principles of business conduct required by shareholders, creditors, clients, and the regulatory and legal codes. Justifiably, investors wonder if the current financial system is any safer than it proved to be in the Credit Crisis. While a host of regulatory reforms have been undertaken to make the financial system safer since the Credit Crisis, and the reforms are aimed at making markets and institutions more transparent, less complex, and less leveraged, they do not appear to have yet made the financial system safer for investors. Investors should have an explicit strategy to manage risks when investing. This paper describes what the author believes to be best practice counterparty risk management that should be undertaken by an investor acting directly and relying on counterparties for certain investment and custodial services or by an investor relying on an advisor to invest on their behalf and manage counterparty risk. Strategies for managing counterparty risk are also detailed.
Commonfund Institute. 15 Old Danbury Road, Wilton, CT 06897. Tel: 203-563-5000; Tel: 888-823-6246; Web site:
Publication Type: Reports - Evaluative
Education Level: N/A
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: Commonfund Institute