Risk ManagementTalking Shop

Talking Shop: How Often Do You Assess Counterparty Risk?

By March 3, 2022No Comments

Editor’s note: NeuGroup’s online communities provide members a forum to pose questions and give answers. Talking Shop shares valuable insights from these exchanges, anonymously. Send us your responses: [email protected].

Member question: “How often do you assess counterparty risk?

  • “For your short-term investments such as bank deposits, what frequency has worked best for your team to measure/assess counterparty risk (e.g., daily to weekly, weekly to monthly, etc.) and what considerations were taken into account for determining frequency (e.g., CDS, credit ratings)? It would also be helpful if you could elaborate if you’ve changed frequency.”

Peer answer 1: “We’ve had a long-standing practice of reviewing counterparty credit exposure twice per month, including CDS (credit default swap), ratings, exposures, stock price data, etc. Some information is reviewed quarterly (e.g., fundamental data/ratios from financials, CDS trends).

  • “While we will continue to review CDS at least twice per month, our more comprehensive reviews will move to at least monthly (rather than twice per month). We will adjust back to more frequent reviews if bank risk elevates.”

Peer answer 2: “We assess counterparty risk formally each month. During times of market dislocation, we enhance the governance/frequency.

  • “For the monthly review, we refresh exposures (broken out between cash and derivatives), CDS, credit rating and outlook, bank tier 1 capital, and our firm’s total assets (i.e. we can take more/less risk depending on our size).”

For more insights on counterparty risk, please read these articles:

Justin Jones

Author Justin Jones

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