SD-07.2 — Credit & Counterparty Risk Management

Business Domain: BD-07 Investment Risk (Middle office) · Applies: BOTH

Purpose

Measures the credit risk of the issuers the portfolio holds, and the credit exposure to the counterparties the firm trades with. Credit & Counterparty Risk Management covers two distinct credit lenses: issuer credit risk — the risk that a bond or loan the portfolio holds defaults or is downgraded — and counterparty credit risk — the risk that a derivative, repo or securities-financing counterparty fails before settling. Both are economic risks the investment-risk function measures independently of the desks.

Service Operations

Assess issuer credit risk — monitor the ratings, credit spreads, probability of default and loss given default of the issuers held.
Monitor downgrade and migration risk — track issuers against rating-based mandate limits and spread-widening risk.
Measure counterparty credit exposure — the current and potential future exposure on OTC derivatives, repo, securities lending and FX forwards, against counterparty limits.
Compute credit valuation adjustment — the market value of counterparty credit risk on the derivative book, and monitor wrong-way risk.
Monitor counterparty concentration — exposure across the counterparty set, the netting agreements and the collateral that mitigate it.
Assess settlement risk — the risk in the settlement window for the relevant instruments.

Inputs and outputs

Inputs: holdings with issuer detail, the derivative and financing trade population, counterparty master data, credit ratings and spreads, collateral and netting-set data.
Outputs: issuer-exposure reports, counterparty exposure against limits, credit-valuation-adjustment figures and downgrade-watch lists — recorded as Risk Measurement (E-19), consumed by SD-07.7.

Entities

Consumes: Holding / Position (E-04, book = ibor for intraday measures, book = abor for period-end), Legal Entity (E-01, issuers and counterparties as roles), the derivatives entities (Master Agreement DR-03, Margin & Collateral Balance DR-04); E-38 Internal Credit Rating (from SD-02.3 — the standing rating the issuer-credit-risk and downgrade-watch view consumes).
Owns: E-19 Risk Measurement on the risk_type = credit and risk_type = counterparty partitions — credit-spread risk, default-probability, exposure-at-default, CVA, counterparty exposures. SD-07.2 is the sole authoritative source for these partitions; SD-07.7 consumes for consolidated reporting

Standards

The CFA Institute treatment of credit risk; the Basel III credit-valuation-adjustment framework as the named methodology; the ISDA master-agreement and credit-support-annex framework for the counterparty terms. The internal credit rating consumed here is produced by SD-02.3.

Open extensions

The boundary with SD-02.3 Credit Research & Analysis — SD-02.3 forms the investment view on a credit; SD-07.2 measures the credit risk the portfolio carries.
The boundary with BD-11 on the collateral and margin that mitigate counterparty exposure.