JRMFI-Paper on Counterparty Credit Risk

We are pleased to share a paper published in the Journal of Risk Management for Financial Institutions. The article written by Dr. Andreas Ita discusses counterparty credit risk based on two recent events.

The default of Archegos Capital Management in March 2021 highlighted that counterparty credit risk for derivatives can be huge, despite daily margining. Concentrated exposures and a fraudulent scheme magnified the banks’ losses to over USD 10 billion.

When energy markets skyrocketed in summer 2022, the banks acting as clearers for struggling energy firms had large amounts at risk since there occurred significant margin shortfalls on energy exchanges. The banks faced the risk to step in if their clients would have been unable to meet the margin calls, which were in the magnitude of billions on some days.

The paper explores how these situations could arise, why the exposures were difficult to detect and how banks could through a rigorous unwinding strategy minimize their losses. Additionally, the paper provides an analysis of the SA-CCR RWA and regulatory capital requirements applicable in the two cases and it discusses the gaps revealed.

Henry Stewart Publications thankfully granted Orbit36 the permission to make this paper available on our webpage. The original article was published in the Journal of Risk Management for Financial Institutions, Volume 16, Number 3, pp. 256-272 (summer 2023)