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!