By Simon Miller
The ongoing financial crisis has driven awareness across the derivatives industry about the importance of undertaking effective counterparty risk management according to a survey from Fitch Solutions.
Credit Valuation Adjustment (CVA) pricing, enhanced trading systems and proactive risk management have all been strengthened according to respondents.
"81% of respondents polled said that the importance of managing counterparty risk had increased over the last two years, with 44% voting for it as their institution's top priority and a further 34% regarding it as very important," said Thomas Aubrey, managing director, Fitch Solutions.
Whilst the survey results showed that the sophistication of counterparty risk management practices still varies widely across firms, there was common recognition on the importance of CVA particularly as a result of increased capital requirements under Basel III accounting regulations which have prompted many firms to prioritise their capital optimisation when hedging counterparty risk.
Fitch added that the challenge participants faced in trying to bridge the 'coverage gap' when assessing counterparty risk for smaller, privately held non agency rated securities or counterparties which can be very illiquid, and where limited information is available, was also highlighted.
"69% of respondents use CDS spreads and indices, but just over 25% suggested that the currently available indices do not adequately capture the number of emerging market and private companies relevant for their hedging needs," added Catherine Downhill, senior director, Fitch Solutions.
"Consensus also appears to have been reached by survey respondents that market participants need to use a mix of credit risk indicators comprised of fundamental financial data, agency credit ratings, CDS and liquidity information," said Fitch.
The full survey can be found here.