During benign market conditions, counterparty credit risk is typically a forgotten risk – it only comes to the fore in times of market turmoil, deteriorating credit and scant liquidity. Yet, according to Shankar Mukherjee, managing director in Citigroup’s Counterparty Risk Group, counterparty credit risk is one of the fastest growing asset classes on Wall Street.
Not only that, but until recently dealers did not have a tool with which to directly mitigate it. Because of this they instead had to adopt conservative measures for their exposures and ended up with capacity constraints. But thanks to a new derivatives tool – the so-called contingent credit default swap (CCDS) – help may be at hand. For Mr Mukherjee, CCDSs offer the first real risk management mechanism to manage counterparty credit risk and, as such, should allow banks to manage it far more precisely.
