Credit Securitisations and Derivatives: Challenges for the Global Markets

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

Frank Lehrbass

RWE Supply and Trading

14.1 INTRODUCTION*

The materialization of credit risk is nothing new to the non-financial industry. The insolvency of Enron in 2001 is one prominent case which made the non-financial industry learn lessons. These “lessons learned” helped to manage the Global Financial Crisis (GFC), e.g. netting and margining techniques minimized losses from Lehman's insolvency. As credit risk remains a relevant topic it pays to have a closer look at the various types of credit exposures encountered in the commodity markets, the available tools for credit risk management and the hedging and pricing of transactions. The specifics of the commodity markets make this chapter a special one as there is not always a one-to-one applicability of techniques from the financial industry. This chapter is written from the perspective of an industrial corporate involved in the commodity markets. Readers interested in corporate risk management in general are referred to the book by Crouhy et al. (2006).

Broadly speaking one encounters two types of credit portfolio in the industrial commodity business and it is important to be aware of their relative magnitudes of credit risk. On the one hand there are the portfolios made up of trading positions, which are typically held by trading houses like Glencore and the like. Trading positions are ...