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Energy firms scrutinise counterparty risk 

September 18, 2015

Helen Bartholomew, IFR Asia

Energy firms are ramping up their use of credit default swap pricing information to more closely monitor counterparty credit risk as slumping commodity prices pile pressure on credit profiles across the sector.

Oil majors, commodity trading houses and utilities are among the growing number of firms that have requested real-time credit derivatives pricing from data provider Markit in recent weeks as they look to more accurately assess their counterparty exposures in a sector that has been crushed by oil and metals prices hitting six-year lows on Chinese growth concerns.

“Energy firms are taking a more sophisticated approach to managing their counterparty risk,” said Gavan Nolan, director of credit research at Markit. “Some of the oil majors have been using CDS data to more effectively allocate capital to suppliers, but the trend is expanding to commodity trading houses and utilities as they tend to have lots of counterparties.”

It is an approach that is bringing corporate risk management closer in line with credit value adjustment desks at banks, which use CDS prices to measure and reserve against potential credit losses stemming from counterparty risk associated with their derivatives portfolios.

Read more: IFR Asia

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