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The recent financial crisis has triggered more studies on counterparty risks. The theoretical research on credit risk with counterparty risks has been built based upon the reduced-form model. In contrast, this paper suggests a structural model where firm value can be reduced due to counterparty risks. After deriving a price formula for corporate bonds, we analyze the credit spreads of the corporate bonds. The effects of the counterparty risk on credit spreads are as follows: First, regardless of the level of the counterparty's credit rating, the credit spreads of a firm increase because of counterparty risks. Second, the lower the counterparty's credit rating, the stronger the impact of either the correlation between the two firms on credit spreads, or the coefficient of reduction in firm value due to counterparty risks on credit spreads. Third, compared with existing structural models, there are some cases in which the structural model with counterparty risks is more consistent with actual credit spreads. These cases depend upon the counterparty's credit rating.

The purpose of this paper is to analyze the consequences of the “safe harbor” provisions of the US Bankruptcy Code that were enacted from 1984 through 2005 and that protect certain financial contracts from standard bankruptcy procedures.

Qualitative methods are used to evaluate whether these provisions of the Bankruptcy Code were successful in their stated goal of reducing systemic risk in the financial system. A model of systemic risk is presented verbally in order to frame the discussion.

Recent evidence indicates that the “safe harbor” provisions, in fact, destabilized the financial system by encouraging collateralized interbank lending, discouraging careful analysis of the credit risk of counterparties and increasing the risk that creditors will run on a financial firm.

This paper indicates that the rewriting of the Bankruptcy Code to favor financial firms has had a profoundly destabilizing effect on the financial system. To put the financial system on more secure foundations, the author proposes that large complex financial institutions be prohibited from posting collateral on over the counter derivative transactions and that the repo‐related bankruptcy amendments passed in 2005 be repealed.

This paper proposes an original framework for understanding systemic risk which drives the results in the paper.

This study aims to survey supervisory requirements and expectations for counterparty credit risk (CCR).

In this paper, a survey of CCR including the following elements has been performed. First, various concepts in CCR measurement and management, including prevalent practices, definitions and conceptual issues have been introduced. Then, various supervisory requirements and expectations with respect to CCR have been summarized. This study has multiple areas of relevance and may be extended in various ways. Risk managers, traders and regulators may find this to be a valuable reference. Directions for future research could include empirical analysis, development of a theoretical framework and a comparative analysis of systems for analyzing and regulating CCR.

Some of the thoughts regarding the concept of risk will be considered and surveyed, and then how these apply to CCR will be considered. A classical dichotomy exists in the literature, the earliest exposition upon which is credited to Knight (1921), who defines uncertainty is when it is not possible to measure a probability distribution or it is unknown. This is contrasted with the situation where either the probability distribution is known, or knowable through repeated experimentation. Arguably, in economic and finance (and more broadly in the social or natural as opposed to the physical or mathematical sciences), the former is a more realistic scenario that is being contending with (e.g. a fair vs loaded die, or die with unknown number of sides.) The authors are forced to rely upon empirical data to estimate loss distributions, but this is complicated because of changing economic conditions, which invalidate forecasts that our econometric models generate.

This is one of few studies of the CCR regulations that is so far-reaching.

The purpose of this paper is to aid understanding of the changes in Basel Committee on Banking Supervision (BCBS) regulatory strategies after the global financial crisis.

The author uses the credit valuation adjustment (CVA) charge reform as a test case for inquiring whether BCBS has departed from its pre-crisis facilitative regulatory strategy path. The regulatory strategy of the CVA charge is discussed.

The charge exhibits a new regulatory strategy that BCBS has adopted. It seeks to manipulate market structures by imposing risk-insensitive capital charge methodologies.

The paper offers a new heuristic to analyse regulatory initiatives and their significance. The CVA charge has not been subject to a regulatory theory-based analysis in prior literature.

In counterparty credit risk management for swaps, forwards, and other derivative contracts, it is recognized that most common applications of credit exposure measurement suffer from the bias that counterparty default is independent of the amount of exposure. Stress tests are often proposed to compensate for this bias, but these measures tend to be arbitrary and cannot be uniformly applied to setting prices and limits as readily as more standardized approaches. The author proposes a framework in which standard measures of counterparty exposure are conditioned on default probabilities. These conditional measures thus account for “rong way” exposures, but fit naturally into current applications.

The purpose of this paper is to answer a specific research question: How have EU and US regulators translated the idea of central clearing into law?

A meticulous legal research is carried out. First, the pre‐crisis regulatory regime for credit default swap (CDS) is reviewed, from a securities law angle as well as from a comparative Euro‐American perspective. Next, the regulatory processes leading to the adoption of the central clearing regulations are discussed. Thereafter, a material comparative analysis is made of the provisions related to central clearing in the EU and US regulatory initiatives. Finally, the paper is concluded with an evaluation of both legislations in the light of all previous analyses.

The research first shows that central clearing regulations rely on a series of presumptions, both concerning the gravity of counterparty risk threats and the necessity of central clearing. Additionally, the EU and US clearing regulations are similar with regard to the broad innovations they introduce, i.e. the mandatory central clearing of a variety of over‐the‐counter derivatives and counterparty risk management requirements for central clearing institutions and for non‐cleared swaps. However, the specific content of the provisions often differs. Furthermore, both legislations are limited to enouncing broad principles. This is also the case for the crucial provisions related to counterparty risk management. Therefore, these provisions in se do not guarantee the proper regulation of counterparty risk management practices. Consequently, much is to be expected from the implementing measures adopted by regulatory institutions.

The paper provides an overview of those provisions in the European and US regulations that specifically concern central clearing for CDS. It is one of the first papers which does this in a very well‐structured and clearly written manner. Also it is one of the first to provide a clear comparison between the provisions in the EU and the US regulations.

Counterparty risk is usually defined as the risk which stems from the fact that the counterparty of a derivative contract is not solvent before or at expiration. As most of the derivative trading activity has been moving from standardized products quoted on futures‐style markets, towards customized products traded on over‐the‐counter markets, the issue of counterparty risk evaluation has increasingly gathered momentum and is now one of the hot topics in option pricing theory. The corresponding options are named vulnerable.