The Counterparty Risk Management Policy Group III Report Includes Detailed Suggestions for Financial Intermediaries

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On August 6, 2008, the Counterparty Risk Management Policy Group III (CRMPG III) released a report entitled

“Containing Systemic Risk: The Road to Reform.” This report is the latest in the series published by a Policy Group that includes senior management from major financial institutions. The report, which was published in response to the credit crisis, recommends a number of changes aimed at mitigating risk in financial sectors and urges major financial institutions to “analyze their internal policies, procedures and practices against the recommendations and reforms outlined in the Report” and monitor their progress in meeting these recommendations.

The report lays out five “Core Precepts” that all large integrated financial intermediaries should follow in

implementing the Policy Group’s recommendations. The precepts require that financial institutions adhere to (1)

the basics of corporate governance; (2) the basics of risk monitoring; (3) the basics of estimating risk appetite; (4)

policies intend to limit contagion; and (5) enhanced oversight.

In making its recommendations regarding risk mitigation, the Policy Group focused on four aspects of financial

reform including: (1) the standards of consolidation under US GAAP of entities currently off-balance sheet coming

on-balance sheet; (2) measures to better understand and manage high-risk financial instruments; (3) significant

enhancements to risk monitoring and management; and (4) measures to enhance the resiliency of financial markets generally and the credit markets in particular, with a special emphasis on OTC derivatives and credit default swaps. The Report briefly touches on “emerging issues” that will require close attention, including (1) the resources allocated to, and the independence of, valuation and price verification; (2) asset price bubbles; (3) supervision of hedge funds; (4) the role of the central bank; and (5) supervisory policy and practice.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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