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Practice paper

Counterparty credit risk: Lessons from recent events

Andreas Ita
Journal of Risk Management in Financial Institutions, 16 (3), 256-272 (2023)
https://doi.org/10.69554/ZNKY4345

Abstract

This paper looks at the lessons learned for risk management from two recent events, the default of Archegos Capital Management in March 2021 and the unusually large price jumps in energy markets in summer 2022. The paper finds that the counterparty exposure from margined derivatives transactions exceeded the required initial margin significantly in both cases, so that the exposures were largely uncollateralised when it mattered. In addition, the standardised approach for counterparty credit risk (SA-CCR) resulted in regulatory capital requirements which were insufficient to cover the banks' losses from the unwinding of large and concentrated derivatives exposures. This made it difficult, even for some large banks, to identify the high loss potential of the transactions with a single client.

Keywords: risk management; derivatives; collateral; standardised approach for counterparty credit risk (SA-CCR); initial margin; Archegos; energy markets

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Author's Biography

Andreas Ita is co-founder and managing partner of Orbit36, a management consultancy specialising in strategic planning, treasury, capital and risk management for banks. Until 2019, he was Head of Group Economic Performance and Capital Optimisation at UBS. Prior to this, he worked for over ten years as a senior trader in equity derivatives for a global investment bank. Andreas is a member of the BTRM faculty and a regular conference speaker. He holds a PhD in banking and finance from the University of Zurich.

Citation

Ita, Andreas (2023, June 1). Counterparty credit risk: Lessons from recent events. In the Journal of Risk Management in Financial Institutions, Volume 16, Issue 3. https://doi.org/10.69554/ZNKY4345.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 16 / Issue 3
© Henry Stewart
Publications LLP

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