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Counterparty Risk in the Over-The-Counter Derivatives Market

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  • Manmohan Singh
  • Miguel A. Segoviano Basurto
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    Abstract

    The financial market turmoil of recent months has highlighted the importance of counterparty risk. Here, we discuss counterparty risk that may stem from the OTC derivatives markets and attempt to assess the scope of potential cascade effects. This risk is measured by losses to the financial system that may result via the OTC derivative contracts from the default of one or more banks or primary broker-dealers. We then stress the importance of "netting" within the OTC derivative contracts. Our methodology shows that, even using data from before the worsening of the crisis in late Summer 2008, the potential cascade effects could be very substantial. We summarize our results in the context of the stability of the banking system and provide some policy measures that could be usefully considered by the regulators in their discussions of current issues.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/258.

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    Length: 19
    Date of creation: 01 Nov 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/258

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    Related research

    Keywords: Stock markets; Risk management; Banking systems; derivative; financial system; derivatives market; credit derivatives; financial institutions; derivative market; bonds; hedge; derivative contracts; derivatives market activity; derivatives markets; credit derivative; hedge fund; commercial banks; financial markets; risk exposure; financial market; credit markets; hedges; hedge ratios; nasdaq; investment management; nominal value; commodity derivatives; equity derivatives; margin requirements; derivatives exchanges; financial stability;

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    Cited by:
    1. Arora, Navneet & Gandhi, Priyank & Longstaff, Francis A., 2012. "Counterparty credit risk and the credit default swap market," Journal of Financial Economics, Elsevier, vol. 103(2), pages 280-293.
    2. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
    3. Garratt, Rodney & Mahadeva, Lavan & Svirydzenka, Katsiaryna, 2011. "The contagious capacity of the international banking network: 1985-2009," University of California at Santa Barbara, Economics Working Paper Series qt0r89f16p, Department of Economics, UC Santa Barbara.

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