Credit risk transfer, with a derivatives twist

Dealers angle to revive market that enables them to offload counterparty exposures, freeing up capital

Quietly, with little fanfare, a niche market for credit risk transfer is emerging. Banks and lawyers report growing interest in structures that enable derivatives dealers to offload unwanted counterparty credit risk to investors.

The trades are complex and highly bespoke. Transactions can take different forms – risk participation agreements, credit risk insurance, guarantees, variants of credit default swaps (CDS) – but the underlying risk transfer remains largely the same.

Banks are pitching the