Counterparty Credit Risk and Clearing of Derivatives – From the Perspective of an Industrial Corporate with a Focus on Commodity Markets

The Global Financial Crisis had a severe impact on the commodity markets on top of the well-known effects on the worldwide economy. Not only the demand for commodities decreased severely thereby hurting the creditworthiness of participants in the wholesale commodity markets, but also the financial standing of commodity customers was negatively impacted including even insolvencies. Two examples are known from the media but are regularly not perceived as commodity related: Lehman was also a participant in the commodity wholesale markets and the German department store Karstadt is still a big customer in the German power market. This paper describes the various types of credit exposures encountered in the commodity markets, the available tools for credit risk management with a special focus on clearing, CDS, the hedging and pricing of transactions differentiated according to their degree of liquidity with a view on contingent CDS. The peculiarities of commodity markets lead to a tailored application of actuarial techniques for practical portfolio management. The application of a three stochastic factor model (commodity, credit, and correlation of the two) to an example portfolio shows that an inefficient use of economic capital is risked if an approach too close to the banking industry is chosen. Worked out examples are presented in order to address readers with a non-industrial background.A revised version has been published in the book: Credit Portfolio Securitizations and Derivatives. Chichester: Wiley & Sons 2013