What is the counterparty risk in your investments? Sounds kind of like the colloquial Bermudian greeting, "Whose ya' family?" But, this is a serious question with serious overtones that certainly was not in the average investor's vocabulary a year ago.

Credit default swaps, prime broker, CLO-collateralised debt obligations, breaking the buck, toxic waste, credit spreads, yield, Alt-A, reverse repos, naked short squeezes, private placements, mezzanine financing, CMO tranches, and haircuts have become familiar buzzwords. When investors woke up last Monday, September 15, to the news Merrill Lynch (and its real live raging bull) no longer existed, many realised that they had little in-depth understanding of investment terms and strategies.

These two weeks since have been a historically unprecedented time for capital markets and those that work in them. In last bear market, tech stock company overvaluations were easy to figure out. Either they were worth something or they were not. The market severely punished company stocks with no revenue producing power.

This time, the market meltdown has been different. This time, the credibility of credit facilities and complex investments were (and still are) linked like daisy chains encircling the globe.

In the first sense, investors are struggling to comprehend what they own because they now know since the financial media have breathlessly informed them of these facts multitudes of times - that some portfolios somewhere may have been directly or indirectly exposed to derivative structures. In a double whammy, market uncertainty and a liquidity drought have made temporary paupers out of princely large cap publicly-traded companies.

The non-industry affiliated individual investor has now embarked on a massive learning curve, dubiously grateful to the great financial news machine that has made it all serious entertainment. This is, after all, what the media is paid to do.

Know what you own. The uncertainty of risk exposures has not been confined to strategies such as credit default swaps, but has had a trickle-down effect to some money market funds. Proactive investment managers have issued comfort letters and held press conferences for their shareholders and clients, providing greater transparency and certainty to their dealings while counteracting the perception that classifies all investments as bad investments.

Lessons reviewed. It is never just about performance. What your money is invested in - is perhaps even more important than how it is invested, what the rate of return is, what the performances fees are and how your financial representative is paid.

A high return earned by taking on high risk, high leverage, and laddered complex investments may not be acceptable even to a knowledgeable aggressive investor when credit markets seize up.

Individuals, companies, charities, governments (who are charged with protecting and preserving public trust retirement plans) will engage in an ongoing dialogue on the management of investment risk. What this means is that many more questions need to be asked. Understandable answers in plain English need to be given.

The process of purchasing a security involves disclosures of risks. Often, later the investor may not have complete recollection of those conversations and will then resort to a prospectus, if provided.

This is a tedious legal document, that can run to more than 150 pages.

It gives investors material information about mutual funds, stocks, bonds and other investments, such as a description of the investment company's business, financial statements, biographies of officers and directors, material risks, leverage, investment policy statements, and any other related information.

No one wants to pour through these tomes to see a perfectly legitimate statement that "from time to time the fund may invest in derivatives or use leverage". This may not be an adequate description in layman's terms to fully describe what the probability of risk of loss may be. Investors, whose portfolios have tanked, have been appalled to find out that an investment with previously great returns was levered, say four - eight times. Unfortunately, when markets turn negative that compounds the loss.

The10 things you should know about investments, as espoused in many financial websites, has at least tripled of late. In the next few articles, we will create a basic checklist to use to figure out what is in your investment account and will start with credit default swaps, the ones on the top of many agendas.

CDS -otherwise known as credit default swaps (do not confuse them with certificates of deposit, they are anything but) are according to Wickipedia - a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a pay-off if there is a default or "credit event" in respect of a third party or "reference entity".

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").

A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.

Got that? Hopefully, you will know one when you see one. Please read on - next week.

Martha Harris Myron CPA -NH1929, CFP® -67184 (US licenses) TEP - Society of Trust and Estate Practitioners. She is a Senior Wealth Manager at Argus Financial Ltd., specialising in comprehensive financial solutions and investment advisory services for individual private clients and their families, business owners, endowments and trusts. DirectLine: 294 5709 Confidential email can be directed to mmyron@argusfinancial.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.