On 6 August 2008, the Counterparty Risk Management Policy Group III (comprising senior officers from many of the world's largest banks) sent a report to the US Treasury Secretary and the Financial Stability Forum (FSF). The report aims to provide a private sector response to the credit crisis and complements others' work in this area, such as the FSF (see Legal update, Financial Stability Forum report recommends actions to enhance market and institutional resilience). It focuses on and makes numerous recommendations in four areas:

1) The accounting standards for off-balance sheet entities.

2) High-risk complex instruments (Instruments). The recommendations include establishing "standards of sophistication" for investors. Other proposals relate to documentation and disclosure practice. For example, there should be a term sheet for all Instruments, including a clear explanation of the Instrument's economics and rigorous scenario analyses showing how it will perform in extreme scenarios.

3) Risk monitoring and risk management.

4) Enhancing credit market resilience, with a particular emphasis on OTC derivatives and credit default swaps. The group recommends the International Swaps and Derivatives Association undertake a number of initiatives, including updating its credit derivative definitions to incorporate an auction mechanism and forming a working group to review the methodology for counterparty terminations.

The last section of the report considers five emerging issues, including valuation and price verification; regulatory structure; and supervisory policy and practice.

Source: CRMPG III press release dated 6 August 2008 and CRMPG III report: Containing Systemic Risk: The Road to Reform, 6 August 2008.