In the shadows

Booming over-the-counter derivatives markets may be generating huge revenues for dealers, but they are also casting a worrying shadow over trading book profits in the form of counterparty credit risk. Are contingent credit default swaps the answer?

Few aspects of the over-the-counter derivatives market are as opaque, or indeed widely feared, as counterparty credit risk management. The present value of exposures at most major firms runs into hundreds of millions of dollars - more than enough to deal a debilitating blow to earnings if ever realised. While most dealers believe, rightly or wrongly, that netting and margining arrangements have largely salved concerns in the interdealer market, the same cannot be said elsewhere. Corporates, for