Counterparty Risk Assessment by Treasurers

Assessing counterparty risks is a crucial task for corporate treasurers to ensure the safety of their financial transactions and short-term investments. Here we have tried to list some steps to best assess counterparty risks. However, it remains a complex task and it is complexifying over time. Think about the recent bank crisis in Spring 2023. Are we treasurers set up at assessing the risks beyond a certain reasonable monitoring? Maybe not. What are the ways to mitigate the risk of counterparty and what are the best practices?

Difficulties in assessing counterparty risk for treasurers

If there's one task that has become complex for any treasurer, it's assessing counterparty risk (on the banking side), particularly for short-term investments. Many treasurers are at a loss when it comes to analyzing counterparty risk. Indeed, even if the sad end of Credit Suisse was foreseeable, given the information we had been receiving for years, the suddenness of it came as a surprise to both, CFO’s and Treasurers. We now know that a weekend or an evening is enough to bring down any bank. How can a treasurer in this context have the tools and the speed required? He/she can't. So, the question is, how do we get out of it? Money-market funds are and remain, whatever one thinks, the best solution for a safe and reliable short-term investment. Why not leave it to a better-placed third-party professional to decide where the risks lie? No matter how sophisticated the monitoring tool, it must be recognized that it can never prevent all counterparty risk. So, let's look for another solution, and that's what we're going to explain in this article.

What advice and best practices can we offer treasurers?

There are several best practices to recommend to corporate treasurers. Some of these are listed below:

Know Your Counterparty (KYC):

It starts by gathering comprehensive information about the (bank) counterparties. This includes their financial statements, credit ratings, information published in the news and business history. We should verify their legal status, ownership, and reputation in the industry.

Credit Analysis:

Treasurers can conduct thorough credit analysis of the counterparty. This involves evaluating their financial health, debt levels, and ability to meet their financial obligations. It may also consider factors such as liquidity, profitability, and cash flow, even if we have limited access to financial information. News and rating agency reviews may help.

Credit Ratings:

It is advised to review the counterparty's credit ratings from reputable credit rating agencies. These ratings can provide an independent assessment of their creditworthiness. But treasurers must be cautious if the counterparty's credit ratings are low or have been downgraded recently.

Financial Statements:

It may be useful to analyze the counterparty's financial statements, including balance sheets, income statements, and cash flow statements. It is as well recommended to look for signs of financial stability and growth. But you must pay attention to any red flags, such as declining revenues or P&L.

Contractual Agreements:

Treasurers should regularly review the terms of any contractual agreements or financial instruments you have with the counterparty. But they also must pay attention to the financial covenants, termination clauses and all other tricky clauses, and dispute resolution mechanisms (e.g., credit facilities, ISDA schedules, etc..).


Although it is a basic principle, treasurers should consider diversifying their exposures to counterparty risk. Therefore, they can avoid overconcentration of risk with a single counterparty or a single financial asset. They must spread their transactions and investments across multiple counterparties when possible.

Collateral and Security:

Another way can be to evaluate whether the treasurer can obtain collateral or security for his/her transactions. These collaterals can provide protection in the event of default by the counterparty. A good example consists in investing in tri-parti repos.

Monitor Continuously:

We must insist on the fact that the counterparty risk assessment is an ongoing process. Regularly reviewing the financial health and performance of one’s counterparties is “good practice” for a treasury department. It must stay informed about industry trends and economic developments that may impact its counterparty's risk profile. The last and recent crises have proven that the occurrence frequency is, unfortunately, increasing.

Risk Management Tools:

Of course, treasurers can consider using performing risk management tools such as credit derivatives, credit insurance (premiums are increasing), or credit default swaps to hedge against counterparty risk. But we are not convinced it is the cheapest and most efficient way to protect the company. Treasurers can also consult experts if they are unsure about the assessment process. They may need specialized expertise, consult with financial advisors, credit analysts, or legal experts. But again, there is no magic recipe.

Therefore, we can say that assessing counterparty risks is a fundamental part of corporate treasury and risk management. By following these steps and staying vigilant, corporate treasurers can make informed decisions to mitigate counterparty risks effectively.

What are the alternatives to classic bank deposits to ensure yield, mitigate risks and simplify treasurer’s life?

Many treasurers and CFOs consider that the simplest and least risky investment is the short-term bank deposit. This may be a mistake. Recent events have reminded us that a bank default is possible and hyper-fast... less than a weekend (e.g. Crédit Suisse, First Republic, Silicon Valley Bank, ...). In these circumstances, we must ask ourselves what could replace such a deposit, while avoiding the risks inherent in deposits. It seems to us that two products stand out from the range of short-term money market products that can limit this risk: i.e., MMFs and tri-party repo.

Clearly, an MMF, even an IMMFA registered fund, does not guarantee the principal and repayment of the invested capital at maturity. However, we know that the risk is limited. Tri-party repo, on the other hand, benefits from collateral support to the value of the deposit plus a haircut more than the nominal value of the deposit. What more could you want? In the second part of this document, we'll see how the treasurer should consider these alternatives to limit the time spent managing counterparty risk without compromising yield or security. The panacea of short-term investing? No doubt, with interest rates so high.

Diversification, striking the balance

In the first part of this article, we discussed counterparty risk, which remains a tricky area for treasurers to manage. Even when equipped with sophisticated tools and a plethora of staff (which, alas, is never the case), they cannot guarantee perfect management of this risk, which is very frustrating. Whatever the intentions, the resources deployed or the expertise, it is extremely complicated to avoid the type of risk encountered in 2008 or, more recently, in the Spring of 2023. As we all know, the risk of a bank default is no longer a pipe dream; it has become a real risk that needs to be carefully managed. As we have already mentioned, there are several alternatives to the bank deposit. One is well known and useful up to a certain limit (i.e. MMF) and the other one still under-utilized (i.e. triparty repo).

Money Market Funds, a reminder

Money Market Funds (MMFs) are considered safe and secured short-term investments for corporate treasurers for several reasons. They present a lot of advantages, including an excellent net return; competitive compared to bank deposits.

Liquidity: MMFs invest in highly liquid, short-term instruments such as government securities, certificates of deposit, and commercial paper. This ensures that corporate treasurers can easily access their funds when needed, making MMFs a convenient choice for managing short-term cash needs.

Diversification: MMFs typically hold a diversified portfolio of a couple of dozen assets. This diversification helps spread risk and reduces the impact of potential defaults or fluctuations in the value of individual securities. Corporate treasurers benefit from this risk mitigation. Furthermore, a MMF can access longer tenors (providing they respect WAL, WAM and maximum tenors imposed). However, having several investments in MMF may present a risk of duplication of risks as different funds can be invested in the same risks. Therefore, the concentration risk treasurers wanted to reduce, comes back eventually. For a limited amount, or using fewer funds, it works. It is why we recommend a much safer product, triparty repo.

Low Volatility Net Asset Value (LVNAV): Many MMFs aim to maintain a relatively stable or low volatile NAV. This means that the value of an investment in an MMF remains relatively constant, minimizing the risk of principal loss.

Regulation: MMFs are subject to regulatory oversight, which includes requirements related to the quality and maturity of their investments. These regulations (including EU regulation) are designed to enhance the safety and stability of MMFs, making them a reliable choice for corporate treasurers.

Transparency: MMFs provide regular reports and disclosures about their holdings, allowing corporate treasurers to monitor the assets within the fund and make informed decisions. But we must confess that, it is difficult to track global portfolios given high number of investment lines and non-standardized naming conventions used.

Low Credit Risk: MMFs typically invest in high-quality, low-risk securities, including government debt and top-rated corporate bonds. This reduces the credit risk associated with these investments, except for the addition of risks coming from the potential duplicates in the different portfolios. Furthermore, corporates should never forget that the investment should remain reasonable and proportionate to the whole size of the fund. Investing more than 10% in a MMF seems excessive.

Competitive Yields: While MMFs prioritize safety, they also aim to provide competitive yields compared to other short-term investment options. Corporate treasurers can earn a reasonable return on their cash holdings (return is net of fees taken by the fund managers.

Accessibility: MMFs are widely available through various financial institutions (and platforms) and can be easily accessed by corporate treasurers, providing flexibility in managing cash balances. It's important to note that while MMFs remain generally considered as one of the safest short-term investments, even if they are not entirely risk-free; there is always a small degree of risk associated with any investment. Corporate treasurers should carefully assess their investment goals, risk tolerance, and regulatory requirements before choosing to invest in Money Market Funds. Additionally, they should stay informed about changes in regulations and market conditions that may impact the safety and performance of MMFs. Change in regulation remains a major risk after couple of financial crises.

Would triparti repo be the forgotten option?

The "tri-party repurchase agreements" are financial transactions commonly used in the world of corporate treasury and risk management. These agreements involve three key parties: (1) Cash Investor (e.g. corporation): This is typically an entity or individual with excess cash looking for a short-term, safe investment; (2) Securities Borrower: This party usually needs to borrow securities for various purposes, such as covering short positions or settling other trades; and (3) Tri-Party Agent: The tri-party agent is a neutral intermediary, often a financial institution like a bank, that facilitates the transaction. They manage the collateral and ensure the proper execution of the repo. Unfortunately, there are still many treasurers not using or not understanding this interesting concept. It seems useful to remind how tri-party repos work. The cash investor provides cash to the securities borrower in exchange for a specific quantity of securities as collateral. The tri-party agent acts as a custodian (e.g. Clearstream, Euroclear) and holds the collateral securities on behalf of the cash investor. The securities borrower pays interest on the cash borrowed, and at the end of the agreed-upon term (usually overnight or a few days), they repurchase the securities at a slightly higher price (the repurchase price). Tri-party repos offer limited risk for investors due to several factors.

Collateralization, the required guarantee

The primary risk in repo transactions is the potential default of the securities borrower. However, in tri-party repos, the collateral is held by a neutral third party (the tri-party agent). If the securities borrower defaults, the cash investor can sell the collateral to recover their funds, reducing the risk of loss.

Advantages presented by tri-party repos

  1. Daily Valuation and Margining: Triparty agents typically revalue the collateral daily and may require additional collateral (margin) if the value of the securities falls. This helps mitigate risk as it ensures that the collateral value remains sufficient to cover the cash investor's exposure.

  2. Diversification: Cash investors can diversify their exposure by entering into multiple triparty repo agreements with different counterparties and securities. This spreads risk across various borrowers and assets.

  3. Short Duration: Triparty repos are short-term transactions, often overnight. This short duration limits the exposure to market fluctuations and potential credit risk.

  4. Legal Agreements (i.e. GMRA): Triparty repo agreements are legally binding contracts that specify the terms, conditions, and remedies in case of default, providing investors with legal protection.

As well as for MMF’s, corporates can now deal them via platforms, such as Treasury Spring, with only one set of documentation signed and with a broader access to the market. The collateral baskets must be pre-defined to know what can satisfy the lender. Overall, triparty repos are considered extremely safe investments for corporate treasurers and investors, primarily due to the collateralization, risk mitigation mechanisms, and short-term nature of these transactions. However, like any financial instrument, they are not entirely risk-free, and investors should carefully assess their counterparty risk and collateral quality when engaging in such agreements.

So, what should you choose to mitigate your counterparty risk?

In conclusion, we can accept that counterparty risk management remains complex for a treasurer, no matter how sophisticated. Consequently, the best and safest strategy is to use the two safest flagship products to diversify risk, mitigating it while ensuring an excellent return, possibly better than a simple and risky bank deposit. There is no panacea, I'm afraid. But there are simple, effective products that can reduce risk, increase process security, and potentially optimize returns. So, what are you waiting for to review your investment strategy?

François Masquelier, CEO of Simply Treasury – Luxembourg December 2023

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).


Photo from Through the Looking Glass: An Insight into the Loan Market Association

Through the Looking Glass: An Insight into the Loan Market Association

Discover what the Loan Market Association (LMA) does, its purpose, how they produce their forms of documentation and how they interact with borrowers.

Photo from What Will the Bank of the Future Look Like?

What Will the Bank of the Future Look Like?

Here are some key aspects of what the bank of the future might look like.

Photo from The LEI: Unlocking the Benefits of a Secure Payments Ecosystem for Corporate Treasurers

The LEI: Unlocking the Benefits of a Secure Payments Ecosystem for Corporate Treasurers

The EACT has been advocating for a digital identity for Corporates for many years now. We believe that, Corporates, like individuals, must have a single identity which help them to identify itself and identify third parties as well in this digital era.

Photo from LkSG Relevant for Treasury on a Case-by-case Basis

LkSG Relevant for Treasury on a Case-by-case Basis

The Supply Chain Due Diligence Act (LkSG) creates the legal framework to improve the protection of the environment and human rights along German supply chains. GACT spoke to Dr. Julia Sitter (White & Case LLP) about the relevance and need for action by treasury departments.

Photo from CMU, The Come-Back!

CMU, The Come-Back!

The Capital Market Union, which was one of the main objectives of the Vander Leyen Commission, is back in the limelight, and is likely to become a priority for the next Commission next summer.