Five years after the financial crisis, progress on timely and accurate counterparty risk measures has been largely unsatisfactory.
Large, complex financial organizations can potentially engage in a broad array of financial transactions with a wide range of counterparties. It is therefore critical for these organizations to understand and manage counterparty exposures. Challenges understanding exposures can arise when a firm operates through many of its own legal vehicles, which in turn conduct business with many external entities, including some that may ultimately be owned by or affiliated with the same counterparty. Many firms discovered during the financial crisis that they could not aggregate counterparty exposures quickly and confidently, which limited their ability to make prudent business decisions in fast-moving markets and resulted in confusion and concern across the marketplace.
National supervisory authorities observed from these experiences that large financial firms had difficulty quickly and accurately aggregating counterparty exposures at the group level. In response, the Senior Supervisors Group (SSG) sponsored a new counterparty exposure data collection program - known as the "Top 20" Counterparty project - during the crisis. The project aimed to inform supervisors across jurisdictions of the levels of and changes in significant bilateral derivatives and other counterparty exposures as well as to enhance their ability to respond. The Top 20 project began in late 2008 and continued through the financial crisis and the recovery.
Despite this initiative, we note that five years after the crisis large firms have made only some progress achieving timely and accurate measures of counterparty risk. Importantly, progress has been uneven and remains, on the whole, unsatisfactory. Given the rising need for accurate and timely counterparty data in firms' own and in supervisory stress-testing plans as well as in other areas of supervisory work, such as collateral management, the lack of firms' progress is even more pronounced.
In March 2013, the Top 20 project transferred to a more comprehensive program administered by a new International Data Hub at the Bank for International Settlements (BIS). At this juncture, we take this opportunity to share insights and experiences from the project. This "Progress Report on Counterparty Data" includes background on the project, reporting expectations, and observations by supervisors and from firms' self-assessments. It also provides context and analysis to support two high-level, critical observations: Continue reading
