Introduction
Before 2008 management of credit risk and exposure was at the discretion of market participants. Since 2008 regulators have created regulations requiring firms to carry out exposure reduction.
The belief is that these regulations will reduce
This course does not cover cleared
Systemic Risk
The capital markets are a globally inter-connected system which defies modelling even more than weather. Think of the interactions and linkages between the FX markets, bonds, equities and derivatives; directly or indirectly they all need each other to function normally.
Regulators learned from the
By requiring a direct connection between risk in OTC derivatives and holding Initial Margin (IM) to cover these, regulators aim to make the market self-balancing as risk-taking means placing more IM. This requires funding and ultimately should reflect back on the trader or desk taking the positions. Should a default occur, the IM assets should help offset losses.