A report prepared by a group of senior officials from a variety of financial firms details best practices for firms to follow to help ensure the stability of the financial system.

The so-called Counterparty Risk Management Policy Group has issued a report that sets out initiatives that aim to reduce the risks of systemic financial shocks and limit the damage of such shocks when they occur. It focuses particular attention on risk management, risk monitoring and enhanced transparency.

Most of the recommendations and guiding principles relate to measures that are within the control of individual institutions. Others entail collective actions by institutions and their trade groups. At the industry level, it calls for “urgent industry-wide efforts to cope with serious back-office and potential settlement problems in the credit default swap market, and to stop the practice whereby some market participants ‘assign’ their side of a trade to another institution without the consent of the original counterparty to the trade. Among other things, this practice has the potential to distort the ability of individual institutions to effectively monitor and control their counterparty credit exposures,” it warns.

The group also found that there were four subjects not directly related to counterparty risk management that could not be ignored, which are related primarily to reputational risk: suitability and disclosure associated with the sale of complex financial products to retail investors; the management of the reputational and financial risks associated with potential conflicts of interest that are inherent in the activities of financial intermediaries; the increasingly complex risk management challenges faced by institutional investors with fiduciary responsibilities; and, the official oversight of hedge funds.

“This emphasis on operational and reputational risks reflects the hard reality that these elements of risk are critically important ingredients to sustaining public confidence in the financial system,” the report notes. “As such they are highly relevant to the goal of financial stability.”

The group says it believes that substantial progress has been made in recent years by market participants in many of the areas discussed by the report. Nonetheless, it views its recommendations and guiding principles as further elevating the standards of practice that financial institutions should follow.

That said, it also notes that these recommendations, “are by no means substitutes for the overriding importance of the time-honored basics of managerial competence, sound judgment, common sense and the presence of a highly-disciplined system of corporate governance. Indeed, these basics are key ingredients to building and sustaining a culture in which reputational excellence and commercial excellence can thrive side-by-side.”

Gerald Corrigan, managing director Goldman Sachs & Co., and chairman of the group, called upon senior management of individual financial institutions to review the recommendations contained in the report and, where appropriate, take steps to bring their business practices in line with these standards.