Improving Counterparty Risk Management Practices

by the Counterparty Risk Management Policy Group

July 1999

Abstract: In January 1999, a group of 12 major, internationally active commercial and investment banks announced the formation of a Counterparty Risk Management Policy Group (CRMPG).  The objective of the Policy Group, whose formation was endorsed by Chairman Greenspan, Chairman Levitt and Secretary Rubin, has been to promote enhanced strong practices in counterparty credit and market risk management.  This was to be achieved by building on the self-improvement efforts being undertaken by individual firms in the immediate aftermath of last year's severe market disruptions, by extending those efforts through collective evaluation of potential new strong practices, by evaluating and proposing improvements in market-wide practices and conventions, and by compiling information on new strong practices and, where appropriate, sharing such information with regulators.  This report sets forth the Policy Group's review of key risk management issues, its evaluation of emerging strong practices, and its recommendations for action.

The Policy Group approached its work as an initiative by market practitioners mainly targeted at improving internal counterparty credit and market risk management practices.  It did so with appreciation for several important principles.  First, those practices must not be thought of as either static or "one size fits all".  Rather, they must be adapted to the circumstances and practices of individual firms and the markets in which they operate.  They also require continuous adaptation and enhancement.  As such, the Policy Group views many of its recommendations as suggestions for improvements best evaluated by the senior managers of each firm -- not as an all or none proposition, but rather in the context of their evolving policies, practices and risk profile.  Second, the Policy Group's recommendations should not be viewed as a roadmap for new regulation or even as a mandated checklist for supervision.  It would be a mistake to attempt to codify risk management practices in that fashion.  Third, the Policy Group's recommendations are not in any way intended to standardize credit terms and conditions, as credit decision making must remain the domain of reasoned, professional credit risk managers at individual firms.  Finally, since the intent is for this initiative to have a broad reach across many disciplines and types of firms, the Policy Group has reached out to involve directly in its various working groups senior practitioners from a broader cross section of U.S. and foreign financial institutions, including banks, investment banks, investment managers, insurance companies and hedge funds.  The Policy Group appreciates the involvement and contribution of these people and firms.  The Policy Group, of course, is responsible for this report and its recommendations.

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