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The Treasurer's handbook - putting a limit on losses

  Will Spinney, The Association of Corporate Trea... |   Free |   The Association of Corporate Treasurers |   Oct 2014 |

Counterparty risk is the risk that a counterparty to a contract will not perform their part of the contract, such as repay a deposit of cash, settle an invoice or supply goods when due. This is called ‘default risk’. It also refers to how much of the contract is performed. In some defaults, all the amounts at risk might be received (for example, in a secured lending), or just some might, or indeed none at all. The total amount of funds lost is known as ‘loss given default’.

This article considers how counterparty risk arises, how it might be measured, and how it can be managed.

Topics covered:
  • Management accounting: Technical: Corporate finance & treasury management: Treasury policies & treasury risk management, Foundational

5 Comments/Reflections

Anna Burrows

Anna Burrows Mar 2018

We need to look at the bank/ insurance company credit rating,share price and CDS to establish the likelihood and impact for our risk register. 
Anna Burrows

Anna Burrows Mar 2018

As I was commenting on the investment strategy, the Treasurer's handbook brought to my attention the need to investigate for risk register for the counterparty default and how much of the investment will be recoverable in the case of default. I also need to check whether we insured in such case to cover our pension liabilities. 
Lauren Smith

Lauren Smith Feb 2016

Direct debit terms for new customers implemented so all invoices unless disputed are taken within 14 days allowing for reduced bad debts.

Existing clients also on monthly direct debits and those not are required to provide regular updates to the credit controller. Any updates missed the account manager then schedules a review with the client.

Cash paid is signed off by a manager and double checked before going to the bank. Deposits are signed at each stage so the last signature is responsible for any missing monies.

Credit checks on all clients are performed annually for existing clients and at the time of a new client.

Victoria Pound

Victoria Pound Sep 2015

Warnasuriya Bandara

Warnasuriya Bandara Aug 2015

I cover Counterparty Default Risk (CDR) in Standard Formula, and this article provides a basis overview