Capital Markets Examiner School, Providence, RI

Derivative Risk – Counterparty

• Risk that counterparty defaults and derivative’s value must be written off

• Chance of counterparty default may put hedge accounting treatment in jeopardy

• Managed with margin and credit support terms

Organic vs. Hedging

Organic Growth or Remixing

 Difficult to incentivize customers to do what you want

 Generally more expensive and time consuming

 Commitment of staff and resources

 Efficiencies are lost