Counterparty risk

Counterparty risk is the risk of a financial loss as a consequence of a counterparty's default. The central government uses swaps to manage the interest-rate and exchange-rate risks on the debt portfolio. A swap with a positive market value is an asset for the central government and exposes the central government to the counterparty's ability to pay. The credit exposure on the individual counterparty is calculated as the market value of the counterparty's swap portfolio less the collateral provided by the counterparty.

In order to reduce the credit risk, the central government receives collateral for the market value of the swap portfolio. In 2015 the central government completed negotiations with the swap counterparties on a new basis of agreement (CSAs) with two-way collateral, meaning that the central government will also pledge collateral to the banks when the market value is positive for them. The transition from one-way to two-way collateral agreements will enable the central government to obtain better terms in swap agreements. The CSA agreements are characterised by:

  • Two-way obligation to pledge collateral.
  • Only accepted collateral is a cash deposit of kroner.
  • The pledged collateral accrues interest at the Danish T/N (Tomorrow/Next) rate. The interest rate may be negative.
  • Threshold value of zero, i.e. full collateral for the market value.
  • Minimum transfer amount of kr. 500,000.

Existing swaps has been transferred to the new agreements.