ISDA®
INTERNATIONAL
SWAPS AND DERIVATIVES ASSOCIATION
NEWS
RELEASE
For Immediate Release
Wednesday, March 31, 2004
For More Information, Please
Contact:
ISDA AGM Press Room, The
Louise Marshall, ISDA New
York, (212) 901-6000; lmarshall@isda.org
ISDA STUDY EXAMINES CONCENTRATION OF CREDIT RISK AMONG MAJOR DERIVATIVES DEALERS
Netting and Collateralization Reduce Interdealer Exposure Significantly; Largest Net Credit Risk
Exposures Average About 2 Percent
§
On average, a major dealer's five largest interdealer
exposures totaled about two percent of the dealer's entire derivatives exposure
after giving effect to netting and collateral. This suggests that dealers
actively and adequately control their counterparty exposures through the use of
netting and collateral.
§
For the largest dealers, use of collateral reduces interdealer
counterparty exposures to less than 10 percent of the original exposure. For a
wider sample of dealers, use of collateral reduces interdealer
counterparty exposures to less than 20 percent of the original exposure.
§
Among major dealers, credit exposure to their top five counterparties
before collateral averaged 15 percent of their total counterparty exposure.
After giving effect to collateral agreements in place, these exposures were
reduced to one percent.
§
For the largest dealers, ISDA Credit Support Annex coverage of interdealer exposures is virtually complete. For a wider
sample of dealers, coverage is about 90 percent.
Before a dealer can require collateral on its counterparty exposure, the ISDA
Master Agreement in place must include a Credit Support Annex.
The
study focused primarily on the risk reducing effects of collateralization,
which is in addition to the benefits firms receive through netting of
counterparty transactions. Based on recent BIS numbers, netting reduces gross
credit exposure by approximately 75 percent.
"The subject of counterparty risk is of great interest to ISDA - in fact,
concern with counterparty risk and its mitigation was one of the primary
factors leading to ISDA's establishment and the
development of the ISDA Master Agreement," said Robert Pickel, Executive
Director and CEO of ISDA. "The strengthening of credit risk mitigation
measures, such as netting and collateralization, have
been integral to the development of the ISDA Master Agreement."
"We undertook this study as part of our mission to educate and inform
policymakers, industry observers and others on the current efforts of market
participants to use risk mitigation tools to reduce their largest
exposures," said Dr. David Mengle, Head of Research for ISDA. "Our
findings show that the largest dealers have successfully reduced their
counterparty credit exposure through the use of ISDA documentation."
In conducting its analysis, ISDA polled its Board member firms to determine the
extent of counterparty credit exposure among major derivatives dealers. A
questionnaire was distributed among Board members, with an assurance that all
individual firm data would be treated as confidential and that only aggregate
results would be shared. Eighteen firms responded, including nine of the ten
largest dealers by notional amounts outstanding. The full report is available
at www.isda.org.
About ISDA
ISDA is the global trade association representing leading participants in the
privately negotiated derivatives industry. ISDA was chartered in 1985, and
today has more than 600 member institutions from 46 countries on six continents.
These members include most of the world's major institutions that deal in
privately negotiated derivatives, as well as many of the businesses,
governmental entities and other end users that rely on over-the-counter
derivatives to manage efficiently the financial market risks inherent in their
core economic activities. Information about ISDA and its activities is
available on the Association's web site: www.isda.org/.
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