C o u n t e r p a r t y  R i s k

 
To optimize the efficiency of the LNG market, trading impediments must be reduced.  Often in commodity markets, tremendous friction is created in the transaction process from the credit and counterparty risk management terms required to execute a trade.  The objective of Redwood Markets is to reduce this friction as it relates to the market for global, physical liquefied natural gas (LNG).
   
 

Unsecured Credit
To avoid costs of trading in inefficient markets, participants open up lines of credit with each other. Lines of credit are open without any liquid security backing a default on performance obligations.

Secured Credit
Participants have either partial security or full security to cover performance defaults, or reduce unsecured credit to smaller limits to manage risk.  Bilateral security comes with high associated maintenance costs and often encumbers financial statements with contingent obligations.

Efficiency Models
Various forms of intermediary and mutual risk models may arise that attempt to layer partial or full security inside a mutual risk structure.  This can take many forms, including “dealer networks”, and usually is for the purpose of providing efficiency such as netting, anonymity, or collective cost reduction.

CCP Clearing
The most efficientmodel in terms of maximizing trade, but is usually associated with higher costs (since the model uses security to offset counterparty risk, and is based on the lowest-common-denominator risk). Anonymity and netting are maximized, risk management is highly standardized.

 

As commodity markets evolve, so does the sophistication of counterparty risk management.  Bilateral markets tend to have the least efficient credit and counterparty assessment processes, and thus the friction of trading is high in the early stages of most markets.  The Redwood Marketplace is the central venue that accelerates the process of adapting more efficient counterparty risk management solutions.  By combining publication of central quantitative measurements, integration of third-party add-ons, and the introduction of efficiency models and central-counterparty structures, the Redwood Marketplace provides the tools and the roadmap to measure, manage and mitigate counterparty risk.