# Counterparty risk

`kaal:entity:counterparty-risk`

**Status.** derived

This node is assembled mechanically from the 23 claims that carry the concept tag `counterparty-risk`. It is a roster of what the corpus says under this term. It is **not** an adjudicated definition: no single statement here has been ruled canonical, and no first-appearance call has been made. Read the claims and judge for yourself.

## Every claim under this term

23 claims across 14 works, 2010 to 2021.

**2010**

- [1558614-021](https://wulfkaal.github.io/claims/1558614-021) [mechanism/argued] *(failure mode)* -- Because U.S. companies historically financed themselves through markets rather than through each other, U.S. managers are less attuned to risks accumulating at other firms, a blind spot that mattered once swaps and other complex instruments made firms directly vulnerable to each other's conditions.
  > Historically, U.S. companies have relied on markets for financing more than they have relied on each other, meaning U.S. managers are perhaps less aware than they should be of the risks that are being incurred by companies other than their own.
  Painter and Kaal, Initial Reflections on an Evolving Standard Constraints on Risk Taking by Directors and Officers in (2010). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1558614

**2011**

- [1806252-003](https://wulfkaal.github.io/claims/1806252-003) [design/argued] -- Building on the increase in capital requirements for counterparty risk already suggested in Basel III, Basel III could add a charge on banks' assets based on their lending exposure to hedge funds.
  > Basel III could also include a charge for banks' assets based on their lending exposure to hedge funds.
  Kaal, Hedge Fund Regulation Via Basel III (2011). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1806252

**2014**

- [2470008-031](https://wulfkaal.github.io/claims/2470008-031) [failure/evidenced] *(failure mode)* -- The interpretation Form PF demands generated particular concern among filers about the definition of counterparties and about counterparty performance measures.
  > The level of interpretation required to answer Form PF precipitated particular concerns among filers pertaining to the definition of counterparties and performance measures for counterparties in Form PF.
  Wulf A. Kaal, The Systemic Risk of Private Funds after the Dodd-Frank Act (2014). SSRN: https://ssrn.com/abstract=2470008
- [2470008-035](https://wulfkaal.github.io/claims/2470008-035) [failure/argued] *(failure mode)* -- The Form PF counterparty questions most affected by filer interpretation, Questions 22 and 23, are the very ones the FSOC uses in stage two to determine the interconnectedness of private funds.
  > Form PF questions 22 and 23 are directly used in FSOC's stage two analysis to determine the interconnectedness of private funds.
  Wulf A. Kaal, The Systemic Risk of Private Funds after the Dodd-Frank Act (2014). SSRN: https://ssrn.com/abstract=2470008

**2016**

- [2714974-008](https://wulfkaal.github.io/claims/2714974-008) [failure/argued] *(failure mode)* -- Some of the most sensitive Form PF disclosures are not readily obtainable by the funds themselves: counterparty credit exposure often cannot be determined by individual fund managers, which makes the reporting requirement burdensome in practice.
  > For example, the disclosure of counterparty credit exposure is sensitive information that often cannot readily be determined by the individual fund managers.
  Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974
- [2714974-025](https://wulfkaal.github.io/claims/2714974-025) [condition/asserted] -- There are no legal limits on hedge fund leverage; the only constraint comes from market discipline supplied by creditors and counterparties through interest rates, credit availability, credit limits, initial margin, and credit spreads.
  > Any limits on a hedge fund's use of leverage come from the market discipline provided by creditors and counterparties.
  Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974
- [2748096-007](https://wulfkaal.github.io/claims/2748096-007) [mechanism/argued] -- Post-LTCM counterparty credit risk management, in which regulators pressed banks to monitor and limit the leverage of their hedge fund clients, appears to have worked: the Amaranth failure produced no financial market repercussions.
  > The lack of financial market repercussions after the Amaranth failure seems to suggest that this approach has been successful.
  Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096
- [2748096-015](https://wulfkaal.github.io/claims/2748096-015) [failure/argued] *(failure mode)* -- Pre-crisis regulatory attention was misallocated: although Bernanke identified failure to manage counterparty risk as the primary cause for concern, the SEC and the Senate Banking Committee concentrated on hedge fund transparency instead.
  > The focus of both of these entities, however, centers more on the issue of hedge fund transparency than on counterparty risk.
  Wulf A. Kaal, Timothy A. Krause, Hedge Funds and Systemic Risk (2016). SSRN: https://ssrn.com/abstract=2748096

**2017**

- [2998097-004](https://wulfkaal.github.io/claims/2998097-004) [failure/argued] *(failure mode)* -- Banks overexposed themselves to private investment fund lending, which allowed LTCM and similar funds to grow significantly and led banks as counterparties to put their own existence at risk.
  > However, banks overexposed themselves to private investment fund lending, allowing LTCM and other private investment funds to grow significantly. As counterparties to private investment funds, such as LTCM, banks put their own existence at risk with their lending practices.
  Wulf A. Kaal, Private Investment Fund Regulation - Theory and Empirical Evidence from 1998 to 2016 (2017). SSRN: https://ssrn.com/abstract=2998097

**2019**

- [3396522-039](https://wulfkaal.github.io/claims/3396522-039) [mechanism/argued] -- Near instant settlement with stable cryptocurrencies removes counterparty risk, and the resulting reduction in counterparty risk boosts consumer confidence and increases transactional certainty relative to systems like Visa that take five to seven business days to pay merchants.
  > Such speed in settlement takes away the counterparty risk and with less counterparty risk, speed of settlement with cryptocurrencies boosts consumer confidence and increases certainty for transactions.
  Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Stable Cryptocurrencies (2019). SSRN: https://ssrn.com/abstract=3396522
- [3396542-002](https://wulfkaal.github.io/claims/3396542-002) [failure/asserted] *(failure mode)* -- In the traditional insurance structure, financial distress or bankruptcy of an individual underwriter harms consumers, who lose the protection of their insurance contract and must seek new coverage.
  > Financial distress or bankruptcy of an individual underwriter affects consumers who may no longer be protected by the insurance contract and have to look for new coverage.
  Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao, Decentralized Underwriting (2019). SSRN: https://ssrn.com/abstract=3396542
- [3405401-016](https://wulfkaal.github.io/claims/3405401-016) [failure/argued] *(failure mode)* -- Trust between counterparties in decentralized systems can only limitedly be assured by smart contracts, because the contract cannot verify the underlying qualities or future conduct of the parties.
  > Trust between counterparties in decentralized systems can only limitedly be assured by smart contracts.
  Wulf A. Kaal, Decentralized Commerce – A Primer on Why Decentralized Reputation Verification Systems Are Needed (2019). SSRN: https://ssrn.com/abstract=3405401
- [3405401-017](https://wulfkaal.github.io/claims/3405401-017) [failure/argued] *(failure mode)* -- Smart contracts leave counterparty information asymmetries unresolved: the tenant of a smart property cannot fully know whether the landlord is providing a worthy property, and the landlord cannot know in advance how likely the tenant is to destroy the premises.
  > In our example above, the tenant of the smart property cannot fully know if the landlord is providing a worthy property. In turn, the landlord cannot know in advance how likely the tenant will destroy the premises.
  Wulf A. Kaal, Decentralized Commerce – A Primer on Why Decentralized Reputation Verification Systems Are Needed (2019). SSRN: https://ssrn.com/abstract=3405401
- [3405660-023](https://wulfkaal.github.io/claims/3405660-023) [failure/argued] *(failure mode)* -- Indirect regulation asks banks to fully assess the risk they incur from hedge fund counterparties, but that assessment is often dubious at best because of the opacity of hedge fund activity.
  > Regulators who regulate banks' risk management processes are in essence asking banks to fully assess the risks they incur in engaging with hedge funds as their counterparties. That assessment is often dubious at best.
  Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660
- [3405660-024](https://wulfkaal.github.io/claims/3405660-024) [failure/argued] *(failure mode)* -- Any risk assessment of hedge funds as counterparties is necessarily incomplete, because there is no common measure for calculating leverage and exposure and because fund trading strategies are dynamic.
  > The absence of a common measure with which to calculate leverage and exposure and the dynamic nature of hedge funds ́ trading strategies is just one example that shows the incomplete nature of any risk assessment of hedge funds as counterparties.
  Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660
- [3405660-035](https://wulfkaal.github.io/claims/3405660-035) [mechanism/argued] -- Indirect regulation makes ex post opportunism by hedge funds less likely because the financial intermediaries, not just the funds, stand to lose reputation and market position if their counterparty risk evaluation proves insufficient.
  > ex post opportunism of hedge funds is less likely considering that not only hedge funds but also their financial intermediaries are endangered to lose their reputation and market position in case it transpired that their risk evaluation of a counterparty hedge fund is insufficient
  Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660
- [3411110-003](https://wulfkaal.github.io/claims/3411110-003) [mechanism/argued] -- Blockchain reduces counterparty credit risk through a specific mechanism: a single shared ledger compresses the settlement cycle so that cash or securities are verifiably in the account within seconds of the trade, leaving almost no window for counterparty default.
  > credit risk is reduced because cash (if selling) or the securities (if purchasing) are in the account for verification shortly after the trade (which could be seconds, if not fractions of a second), because the settlement cycle is substantially reduced.
  Wulf A. Kaal, Samuel Evans, Blockchain-Based Securities Offerings (2019). SSRN: https://ssrn.com/abstract=3411110
- [3411110-014](https://wulfkaal.github.io/claims/3411110-014) [condition/argued] -- Any settlement completed in less than ten seconds removes counterparty risk and with it systemic risk entirely, which makes settlement speed, not disclosure, the operative variable for systemic risk.
  > Most importantly, any settlement that takes less than 10 seconds, if ever achieved in any setting, removes counterparty risk and with it systemic risk entirely.
  Wulf A. Kaal, Samuel Evans, Blockchain-Based Securities Offerings (2019). SSRN: https://ssrn.com/abstract=3411110
- [3411110-015](https://wulfkaal.github.io/claims/3411110-015) [predictive/argued] -- If blockchain pushes settlement finality into the seconds range, the entire regulatory infrastructure built to address counterparty and systemic risk would have to be reformed, and most systemic risk and counterparty risk regulation would become unnecessary.
  > Arguably the entire regulatory infrastructure that has been tailored to address counterparty- and systemic risk would need to be reformed if settlement finality can be increased to the seconds range with blockchain technology.
  Wulf A. Kaal, Samuel Evans, Blockchain-Based Securities Offerings (2019). SSRN: https://ssrn.com/abstract=3411110

**2021**

- [3808852-024](https://wulfkaal.github.io/claims/3808852-024) [mechanism/argued] -- Conflicts of interest and counterparty risks are absent on a decentralized exchange because proprietary trading intermediaries such as market makers and centralized third-party operators cannot inject themselves into a transaction.
  > Proprietary trading intermediaries, such as market makers and centralized third-party operators, cannot inject themselves in a transaction. As a result, conflicts and counterparty risks are absent in a DEX.
  Wulf A. Kaal, Decentralization and Feedback Effects (2021). SSRN: https://ssrn.com/abstract=3808852
- [3936876-013](https://wulfkaal.github.io/claims/3936876-013) [mechanism/asserted] *(failure mode)* -- Centralized cryptocurrency exchanges require users to hand over their assets and then act as custodian, issuing what are essentially IOUs for users to trade with on the platform.
  > These centralized cryptocurrency exchanges require users to hand over their assets to the exchange, who then acts as a custodian and essentially issues IOUs for users to trade with on the platform.
  Wulf A. Kaal, Hayley Howe, Custody of Digital Assets (2021). SSRN: https://ssrn.com/abstract=3936876
- [3936876-034](https://wulfkaal.github.io/claims/3936876-034) [mechanism/asserted] -- Credit risk is low in digital asset transactions because the transactions are made instantaneously, which removes the counterparty performance window that generates credit risk in traditional custody.
  > Fortunately, this risk is low in digital asset transactions because transactions are made instantaneously.
  Wulf A. Kaal, Hayley Howe, Custody of Digital Assets (2021). SSRN: https://ssrn.com/abstract=3936876
- [3949098-019](https://wulfkaal.github.io/claims/3949098-019) [mechanism/argued] -- Reputation non fungible token staking removes counterparty risk because the desire to preserve and increase reputation scores dominates DAOIC decision making, making bad actors less likely to appear since their reputation would inevitably suffer.
  > Similarly, RNFT staking by DAOIC members removes counterparty risk. The desire to preserve and increase RNFT scores predominates the DAOIC decision making. Therefore, bad actors are less likely to occur in the system as their reputation would inevitably suffer.
  Wulf A. Kaal, Reputation as Capital – How DAOs Upgrade Finance (2021). SSRN: https://ssrn.com/abstract=3949098

## Verify

Every claim above resolves to a record carrying a verbatim source quote, the sha256 of the source PDF, and a preformatted citation. Nothing here asks to be taken on trust.

    curl -s https://wulfkaal.github.io/entities/counterparty-risk.md | sha256sum

**Canonical form.** This markdown file is the canonical hashed representation of this entity node. Its sha256 is the content hash.