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OTC equity derivatives: Counterparty risk is big issue for buy side

Almost two-thirds of asset managers at buy-side firms in the US believe the continuing credit crisis is having a big impact on the trading of over-the-counter derivatives, according to research and consultancy firm Tabb Group. Meanwhile, 57% say the leading impact of the credit crisis is an increased focus on counterparty risk.

"When we spoke to people the fear and the uncertainty in the overall marketplace was increasing the usage of equity derivatives as a hedging product. But who you do that trade with is a different story," says Adam Sussman, New York-based director of research at Tabb and author of the study Equity swaps and OTC options 2008: a buy-side perspective.

The near collapse of Bear Stearns in March got investors worried about counterparty risk at banks they had OTC exposures with. The fall of Lehman Brothers in September brought the reality of big-bank failure crashing home and truly brought the issue of counterparty risk to the fore.

Tabb interviewed 17 asset managers and 15 hedge funds with, collectively, $6.35 trillion of assets under management. The firm found that more than 50% of asset managers are tightening the process around measuring and managing counterparty risk.

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