Isda publishes credit exposure analysis

Netting and collateral reduce credit exposures to such a level that on average a major dealer’s five largest inter-dealer exposures total just 2% of its entire derivatives exposure, according to new research by the International Swaps and Derivatives Association.

Isda said the findings suggest dealers adequately control their counterparty exposures.

For the largest dealers, use of collateral reduces inter-dealer counterparty exposure to less than 10% of the original exposure. Using a wider sample, the figure rises to less than 20% original exposure.

Among major dealers, credit exposure to their top five counterparties before collateral averaged 15% of their total counterparty exposure. With collateral agreements in place these exposures were reduced to 1%.

“We undertook this study as part of our mission to educate and inform policymakers, industry observers and others on the current efforts of market participants to use risk mitigation tools to reduce their largest exposures,” said David Mengle, Isda’s head of research.