We are party to a large number of derivatives transactions that may expose us to unexpected market, credit and operational risks that could cause us to suffer unexpected losses. Fluctuations in asset values or rates or an unanticipated credit event, including unforeseen circumstances that may cause previously uncorrelated factors to become correlated, may lead to losses resulting from risks not taken into account or anticipated in the development, structuring or pricing of a derivative instrument. Certain derivative contracts and other trading agreements provide that upon the occurrence of certain specified events, such as a change to our or our affiliates’ credit ratings, we may be required to provide additional collateral or take other remedial actions, and we could experience increased difficulty obtaining funding or hedging risks. In some cases our counterparties may have the right to terminate or otherwise diminish our rights under these contracts or agreements upon the occurrence of such events.
We are also a member of various CCPs, which results in credit risk exposure to those CCPs. In the event that one or more members of a CCP default on their obligations, we may be required to pay a portion of any losses incurred by the CCP as a result of that default. A CCP may also, at its discretion, modify the margin we are required to post, which could mean unexpected and increased funding costs and exposure to that CCP. As a clearing member, we are exposed to the risk of non-performance by our clients for which we clear transactions, which may not be covered by available collateral. Additionally, default by a significant market participant may result in further risk and potential losses.