Risk Control Shows Big Improvement

Financial News, October 19, 2003 | Go to article overview

Risk Control Shows Big Improvement


Byline: Natasha de Teran

Risk management and operational control of credit derivatives have shown big improvements, according to a survey to be published by PricewaterhouseCoopers.Findings for 2003 will show improvement in back office, operational and product control areas, while the IT and business management have also shown marked changes for the better.

The survey, in which 15 leading credit derivatives dealers took part, is the second of its kind. Last year, the firm conducted a similar survey with 12 participating banks.

One credit derivatives head says: "These results are encouraging and should be reassuring to management, regulators and dealers alike. More investment is obviously necessary and the recent market-wide initiatives will have to be followed through. But the market seems to have moved forward, and behaved responsibly."

The dealer cites the positive impact of International Swaps and Derivatives Association's (Isda) efforts as well as a new credit derivatives database, called Project Red. Earlier this year, Isda developed a new Master Confirmation Agreement, a single document for the inter-dealer community, and new credit derivative definitions, which ensure greater legal certainty for the instruments.

Project Red is accurate data on credit derivatives that details reference entity names and related reference obligations on which credit derivatives are based. Run by the London-based Mark-It Partners, it eliminates the disputes that could arise between derivative houses over which company is the subject of a deal.

The service went live in the summer with approximately 1,000 reference entities, and should be fully operational by the end of the year, enabling market participants to precisely match close to 2,000 reference entities globally. Most of the high-profile legal cases in the credit derivative market have centred on disputes as to which entity was being insured, or which bonds would be deliverable in the event of a default. …

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