How are counter party credit risk assessments used?
That depends on the particular company, objectives and applications; however, typical uses include: – to determine if a transaction can or should be entered into with a particular counter party based on the assessment of their likely ability to perform, – to determine the level of acceptable credit risk exposure for the counter party and the corresponding credit line to be allocated for trading and transactions, – to establish the level of collateral and credit protection provisions in swap agreements and/or transaction provisions, – to determine when risk mitigation strategies should be applied to reduce exposures to existing counter parties, and – to aid in the assessment by independent auditors that a firm is an on-going concern.
