Counterparty credit risk in portfolio risk management

Even as financial markets move towards settlement through clearing houses, significant volumes of existing and new transactions remain bilaterally settled, especially as non-standard derivatives may not qualify for central clearing.

Prudent risk management of credit portfolios includes measurement and limitation of exposure to individual issuers to manage concentration risk. Investment portfolios will have limits, for example, on percentage of current value invested in securities issued by "Bank XYZ". Where over-the-counter (OTC) derivative counterparties are also issuers of securities held, counterparty risk may be incremental to issuer exposure. If a portfolio includes a swap with Bank XYZ as the counterparty, then exposure to them failing on that swap should be considered alongside exposure to them failing on their debt issues.

UBS Delta explains how it is equipping its clients against counterparty exposure and other investment risks.