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Counterparty Credit RiskCounterparty credit risk is the risk arising from the possibility that the counterparty may default on amounts owned on a derivative transaction. Derivatives are financial instruments that derive their value from the performance of assets, interest or currency exchange rates, or indexes. They may include structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, and forwards, either singly or in various combinations. A bank’s loan portfolio is typically its largest asset and predominate source of revenue. Consequently, it is also one of the greatest sources of risk, making effective portfolio management a key factor in bank safety and soundness. References Credit Derivatives—Guidelines for National Banks (OCC 1996-43, August 1996) Risk Management of Financial Derivatives (BC 277, October 1993) Risk Management of Financial Derivatives and Bank Trading Activities—Supplemental Guidance (OCC 1999-2, January 1999) |