Credit Insight: The Backbone of Counterparty Risk Management

An effective counterparty strategy must provide clarity on counterparties’ credit strength, individually and collectively, and have a desired “benchmark” level. Changing credit landscapes, aggregation challenges and inconsistent and irregular policy practices are just some of the challenges facing treasurers transitioning from a reactive counterparty risk management practice to a proactive benchmarked approach. The difficulty in developing an effective strategy lies not in identifying the sources of risk, but in understanding the credit risk and managing it. In response to these challenges, separately managed accounts, when used as a risk management tool, may be beneficial for risk mitigation due to their exposure flexibility.