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BOARD OF GOVERNORS 

OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

DIVISION OF BANKING 

SUPERVISION AND REGULATION 

SR 11-10 

July 5, 2011 

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE 

SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK 

SUBJECT: Interagency Counterparty Credit Risk Management Guidance 

The federal banking agencies1

 are issuing the attached Interagency Supervisory Guidance 

on Counterparty Credit Risk Management. It is intended primarily for use by banking 

organizations with large derivatives portfolios in establishing and maintaining counterparty 

credit risk (CCR) management practices, as well as for supervisors as they assess and examine 

such institutions’ CCR management. This guidance would generally not be applicable to 

community banking organizations and banking organizations with insignificant derivatives 

portfolios. Banking organizations that primarily use derivatives to hedge interest rate risk, and 

already comply with previously established CCR guidance, should not be subject to any new 

requirements as a result of this guidance. 

Counterparty Credit Risk Management 

CCR is the risk that the counterparty to a transaction could default or deteriorate in 

creditworthiness before the final settlement of a transaction’s cash flows. Unlike the credit risk 

of a loan, where only the lending banking organization faces the risk of loss, CCR creates a 

bilateral risk of loss because the market value of a transaction can be positive or negative to 

either counterparty. CCR is a multidimensional form of risk, affected by the exposure to and 

credit quality of the counterparty, both of which are sensitive to market-induced changes. It is 

also affected by the interaction of these risks, for example the correlation between an exposure 

and the credit spread of the counterparty, or the correlation of exposures among the banking 

organization’s counterparties. 

Constructing an effective CCR management framework requires a combination of riskmanagement techniques from the credit, market, and operational risk disciplines. This guidance 

reinforces sound governance of CCR management practices through prudent board and senior 

management oversight, management reporting, and risk-management functions. The guidance 

 

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 The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of 

the Comptroller of the Currency, and the Office of Thrift Supervision. 
 

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also elaborates on the sound practices for an effective CCR management framework and 

associated characteristics of adequate systems infrastructure outlined below. 

Governance 

The board of directors or a designated board-level committee (board) should clearly 

articulate the banking organization’s risk tolerance for CCR. Senior management should 

establish and implement a comprehensive risk measurement and management framework 

consistent with this risk tolerance that provides for the ongoing monitoring, reporting, and 

control of CCR exposures. 

A banking organization’s senior management should report counterparty exposures to its 

board at a frequency commensurate with the materiality of exposures and the complexity of 

transactions. To allow for an understanding of exposures and potential losses under severe 

market conditions, reports should include concentration analysis and CCR stress testing results. 

Reports should also include an explanation of any measurement weaknesses or limitations that 

may influence the accuracy and reliability of the CCR measures. 

A banking organization’s board and senior management should clearly delineate the 

respective roles of business lines versus risk management in terms of both initiating transactions 

that have CCR and ongoing CCR management. The board and senior management should 

ensure that the risk-management functions have adequate resources, are fully independent from 

CCR-related trading operations, and have sufficient authority to enforce policies and to escalate 

issues to senior management and the board (independent of the business line).

Risk Measurement 

A banking organization cannot effectively manage CCR without effectively measuring 

this risk. Given the complexity of CCR exposures, a banking organization should employ a 

range of risk-measurement metrics and approaches in order to promote a comprehensive 

understanding of CCR and how it changes in varying environments. Concepts discussed in this 

section include 

 use of appropriate metrics, 

 measurement of exposure at various levels of aggregation, 

 concentration identification and measurement, 

 stress testing to inform the banking organization’s exposure and concentration 

management,

 credit valuation adjustment measurement and management, and 

 wrong-way risk2

 measurement and management. 

 

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 This risk occurs when the exposure to a particular counterparty is positively correlated with the probability of 

default of the counterparty itself. 
 

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Systems Infrastructure Considerations 

A banking organization should ensure that its systems infrastructure keeps up with 

changes in the size and complexity of its CCR exposures and the over-the-counter (OTC) 

derivatives market in general. In order to maintain a systems infrastructure that supports 

adequate CCR management, the banking organization should pay particular attention to data 

integrity and reconciliation, automation and tracking, and appropriate use of add-on 

methodologies to capture exposures outside of the main measurement system(s).

Risk Management 

The variable nature of CCR requires certain specific types of controls, such as 

meaningful limits on counterparty exposures based on potential future exposure and adequate 

margin and collateral haircut guidelines for all products with CCR. Effective management of 

CCR also includes validation of CCR models and a tested ability to manage, and close out if 

necessary, counterparties in distress. 

Managing Central Counterparty (CCP) Exposures 

Well-regulated and soundly managed CCPs can be an important means of reducing 

bilateral counterparty exposure in the OTC derivatives market. However, CCPs also concentrate 

risk within a single entity. Therefore, it is important that a banking organization centrally clear 

transactions through regulated CCPs with sound risk-management processes and strong financial 

resources, so that the CCPs will be able to meet their obligations under extreme stress conditions. 

To effectively manage CCP exposures, the banking organization should regularly review the 

individual CCPs to which it is exposed. 

Legal and Operational Risk Management 

A banking organization should ensure proper control of (and access to) legal 

documentation and agreements, incorporating accurate legal terms and provisions into its 

systems infrastructures. Significant credit losses can occur if a counterparty questions a 

contract’s appropriateness. 
 

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Contacts 

Reserve Banks are asked to distribute this letter to those banking organizations 

supervised by the Federal Reserve in their districts that have derivatives portfolios or otherwise 

have exposure to counterparty credit risk. Questions regarding this letter may be directed to 

David Lynch, Manager, Quantitative Risk Management, at (202) 452-2081; or Dwight Smith, 

Senior Supervisory Financial Analyst, Capital and Regulatory Policy, at (202) 452-2773. In 

addition, questions may be sent via the Board’s public website.3 

Patrick M. Parkinson 

Director 

Attachments: 

 Interagency Supervisory Guidance on Counterparty Credit Risk Management 

Cross References: 

 SR letter 99-3, “Supervisory Guidance Regarding Counterparty Credit Risk 

Management”

 

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 See http://www.federalreserve.gov/feedback.cfm.