Common use of Systemic Risk Clause in Contracts

Systemic Risk. Systemic risk is the risk that a major failure or disruption in one institution or segment of the market will affect other institutions, leading ultimately to a breakdown of the financial system. The use of derivative transactions and the potential failures within the derivative markets can contribute to this overall systemic risk. Systemic risk, however, is not specific to the derivative markets, and failures and disruptions in other institutions and markets can likewise affect and undermine the derivative market. Systemic failure is generally addressed by regulatory policies which attempt to lessen the risk of a major institutional failure and policies and procedures which attempt to maintain stability and confidence in the overall financial system in the face of a failure in any one institution or market. As part of its counterparty risk guidelines, the Company attempts to diversify its use of counterparties and markets, which also helps to lower systemic risk.