Fed Reiterates Supervisory Guidance on Counterparty Credit Risk Management

The Federal Reserve today reminded banks of its expectations for safe and sound practices with regard to counterparty credit risk management. The Fed’s letter—which was targeted at Fed-supervised firms with large derivatives portfolios and relationships with investment funds—came in response to the recent default of Archegos Capital Management, which resulted in more than $10 billion in losses across several large banks, principally outside the U.S.

The Fed reminded firms that they should receive adequate information with appropriate frequency to understand the risks of the investment fund, including position and counterparty concentrations, and either reconsider the relationship or set sufficiently conservative terms for the relationship if the client does not meet appropriate levels of transparency.

In addition, firms should ensure that the risk management and governance approach applied to the investment fund is capable of identifying the fund’s risk initially and monitoring it throughout the relationship; that applicable areas of the firm are aware of the risk posed by investment fund clients; and that margin practices remain appropriate to the fund’s risk profile as it evolved, the Fed said.