Hedges: Counter Party Risk - April 3

[dan_s]

From my friends at Aegis Energy:
"We have been receiving many questions around this as some clients have large Mark-to-Markets. In general, yes, default risk for these counterparties have gone up, but its still very small and they came up from near 0%. Bank’s don’t typically hold many of these positions on their books, they usually execute an offsetting position at the time of the trade. The more important question is do they have the cash to cover their clients redemptions if they chose to do so. I believe its our experience and stance that this shouldn’t be an issue."

MY 2-CENTS WORTH: Each time we have a big drop in commodity prices this issue is raised. I don't recall it ever being problem in the real world and I believe the banks and counter-parties are in much better shape today than they were in 2008.