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Monday, 7 November 2011

Counterparty risk – it’s more common than you think!

The recent collapse of MF Global has brought up lots of discussion on counterpart risk.

Some commentators were espousing why certain over-the-counter (OTC) products or derivatives were not suitable for retail investors…

2 legs bad; 4 legs good! Just like in George Orwell’s Animal Farm, it’s too simplistic to make blanket statements…

I would like to offer my “bottom-up” views on counterparty risks:

1)         There are so many CFD brokers in Singapore, have any of the MF Global investors made comparison shopping before deciding on MF Global?

Did you choose because it’s “cheaper”?

Or did your “friend” recommend it, and you “trusted” your friend?

Eh… Perhaps you are a counterparty risk to yourself by being “cheap” and not doing your own research? (And you shout here and there must hire Singaporeans first; but what you do? Sign up with foreign broker…)

2)         Some are very secure in the knowledge they only stick with “safe” blue chip stocks. Never touch derivatives you say?

But did you check whether the blue chip stock you invested in – is it heavily dependant on a few big customers? What if these customers default on their obligations? You have done fundamental research on the blue chip stock, but did you do the same for their customers? Not so secure now right?

And I have not even mentioned political risks (contracts in Libya gone poof!), or legal risks (BP oil spill), or warranty risks (Honda quality recalls), and Act of God risks (flooding, earthquakes, etc)?

These are not counterparty risks you say! OK, if you say so. And you are most probably right!

3)         The good thing about thinking in “shades of grey” - instead of in “black and white” - is that I treat RISKS as all the same. Never mind in what “form” or “definition” they come in.

The moment I part with my money in an investment or trade, better don’t take things for granted or lull myself into false sense of security.

a)     I open my eyes wide wide.

b)     I dig my ears a few times and put one hand to my ear.

c)      I take a few sniffs now and then to check the air quality.

d)     And I stretch out my remaining arm to feel my way around. 

Yes, I am a silly rabbit! Well, once upon a time, US bonds were considered “risk free”. I don’t know about you, but now I believe in:

“Trust is good; but control is better!”  (Got to love the Germans!)

4)         What? You just work and save? No investments whatsoever. So no counterparty risks?

If the company you worked for lost a major account/customer, no corresponding “restructuring” to align the company’s cost structure with the new revenue stream? (Ask PSA workers when Maersk went to JB)

How about legislation’s counterparty risks that may affect your industry or company? You have never “suffered” from bad policies and legislations? (censored, censored)

Serve you right for not voting to minimize counterparty risks! You can’t legislate against stupidity you know!?

Friend, eat tofu not careful can also choke to death! LOL!



  1. "eat tofu" can choke to death??? No no no. At most kena slapped.

  2. LOL CW8888! You are so right!

    Experience is experience ;)

  3. well, just to share MF global is one of my main broker.

    the very good news is i withdraw most of my $$ few weeks ago before it collapes.

    the bad news (somehow i got to find some haha) is i still got a few thousand stuck inside there.

  4. Hi SMOL,
    "“Trust is good; but control is better!” (Got to love the Germans!)

    i think once you part with your money for whatever after you do your homework , your money is out of your control. You can only monitor. Still you can not monitor as the insiders do. Another words you will lose something even if you manage to get out, when unfavourable weather happens.
    It happens, it happened.
    You can't do much about it.
    So i always try to be "K" only. And try very hard not to be "KK".
    "KK" has done me in a few times already.
    Ha! Ha! But still survive.

  5. Hi coconut,
    You get out because you saw RED FLAGs or your normal trading?

  6. 1) Yes Temperament,

    "Control" meant monitor or follow-up in this context.

    Took me quite a while to figure out your "K" and "KK". It's in Hokkien right? If not, I am lost!?
    Translation please ;)

    2) Coconut,

    Glad you are relatively safe and not too much affected. I wish you well. No wonder you were "quiet" these few days.

  7. Hi SMOL

    "Eat tofu" can choke if tofu is particular big and nice to eat :-)

    Risk is everywhere, but most of us are not trained to think in terms of counter-party risk. The MF Global episode (and actually Lehman) teaches us to really know our counter-parties before we take big positions with them.

    Be well and prosper.

  8. 1) Hello Panzer,

    Yes, fool me once, shame on you. Fool me twice, shame on me!

    2) Yes Temperament,

    May the light of his Grace shine on us all. Even for pagan agnostics like me!

    Must constantly remind myself not to get ahead of oneself...

  9. All investment by nature are risky; otherwise they will be known as saving. LOL

  10. Hi CW,
    i think nothing is save. It's only a matter of the degree of risk, and type of risk. No matter what we must know what we are doing and why.

  11. thanks haha, i'm doing well. on "vacation" man.

    no i didn't see any red flat. it is my way of moving funds from short to long equity in cash market.

    unfortunately, i'm only partially long (knn), still very piss off with myself by cutting my position at the low (knn).

  12. by the way, i think money in MF local a/c should be safe, it just need some time to settle.

    MF is a big player in global market both equity and derevetives, if they are not "safe", nothing is safe.

  13. Coconut,

    I am a bit strange. No matter where I travel, I will never buy something that's available in Singapore if I can help it (even if Singapore is a little bit more expensive).

    I did try SAXO's platform (big in Europe) but decided on local POEMs.

    I guess if things go wrong, I like the fact I can go to the owner's house and spray paint: Owe $; pay $!!! (Please don't do it! Against the law you know!?)

    Maybe it's because I grew up with childhood friends in Redhill and Mei Ling Street - families with "black flag" outside their homes, and uncles with "artworks" on their bodies. LOL!

    Your "knn" brings back fond memories of my childhood in Queenstown during the 70s...

  14. so shares deposited in the CDP is the safest after all... at least guaranteed by the Singapore govt

    I had MF Global CFD account too... but luckily I had withdrawn the money

  15. Glad you are safe and sound RemSG!

    By the way, love your blog!!!

    Ha ha! You play with CFD too ;)

    Got time come to Queenstown more often!

  16. I also have IG Mkts

    now only using it to long/short the indices

    not going to commit too much into these CFD liao


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