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Counterparty Risk in the Over-The-Counter Derivatives Market

Author

Listed:
  • Manmohan Singh
  • Miguel A. Segoviano Basurto

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.

Suggested Citation

  • Manmohan Singh & Miguel A. Segoviano Basurto, 2008. "Counterparty Risk in the Over-The-Counter Derivatives Market," IMF Working Papers 08/258, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:08/258
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    Citations

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    Cited by:

    1. Vahan Nanumyan & Antonios Garas & Frank Schweitzer, 2015. "The Network of Counterparty Risk: Analysing Correlations in OTC Derivatives," Papers 1506.04663, arXiv.org, revised Sep 2015.
    2. Calice, Giovanni, 2011. "The Impact of Collateral Policies on Sovereign CDS Spreads," ECMI Papers 12234, Centre for European Policy Studies.
    3. repec:kap:annfin:v:13:y:2017:i:4:d:10.1007_s10436-017-0308-x is not listed on IDEAS
    4. 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.
    5. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
    6. 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.

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