They favour an "hourglass" solution: competition among a number of exchanges and settlement firms, with a single central counterparty, so that users can net off sales and purchases.
Barclays stepped in for DFC, a bankrupt New Zealand mortgage bank in 1989, replacing it as a counterparty for all its interest-rate swaps.
And they are doing more trading through clearing-houses and exchanges which reduces both operational and counterparty risk.
This may seem like a good idea when counterparty risk is low, but that can change abruptly and dramatically.
But it has yet to decide who the central counterparty will be.
This structure thus gives incentives to executives to underwrite instruments that are profitable in the long term.Kumiko Yoshinari Bethesda, MarylandThere is an argument that CDSs should be traded on exchange, or at least using a central counterparty.
With corporate defaults on the rise, the prospect of widespread counterparty woes "overhangs the market like a Damocles sword that is bound to fall", George Soros, an outspoken investor, has opined.Efforts to prevent catastrophe date back to 2005, when the Federal Reserve Bank of New York first banged dealers' heads together over sloppy trade processing.
ING did not have Bear as a counterparty on credit-default swaps, but apart from its direct lending relationship it also had exposure to the Wall Street bank via repo agreements and potential moral obligations to investors in its money-market funds that had invested in Bear.
Futures contracts are bought with only a small deposit or margin; option sellers have to cover buyers' losses, which may be many times the value of the premium; the net exposure of a swap counterparty may be smaller but the gross position will be huge, a problem if the counterparty defaults.This made it hard for regulators to keep track of a firm's exposure.
That includes a charge for the risk that a counterparty goes bust.
Counterparty controversy Metal cashing Hope springs a trap ReprintsBut the bidders have a tricky balancing-act to pull off.
