This article proposes a centralized financial utility that would mitigate
systemic counterparty risk by guaranteeing against counterparty defaults and
providing asset protection to its customers. The utility would hold collateral
posted to it by each customer and issue secured counterparty risk bonds (CRBs).
The fees paid to the utility by customers seeking counterparty risk protection
would be paid as coupons to the CRB holders, and the principal would be repaid
at maturity after subtracting any losses from counterparty defaults. This
approach has numerous advantages, including creation of a market mechanism to
mitigate systemic counterparty risk, protection of financial institutions from
counterparty defaults, and enhancements to the regulatory monitoring
process.