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There has been a lot of discussion recently about how the credit function will undergo revolutionary changes in the next few years. This highlights what Triple Point has been saying for the last 12 months, “Uncertain regulations in both the US and Europe will significantly increase the cost of trading and require the credit department to take a strategic position in optimizing portfolios.”
Rather than a revolution, we talk about the ‘New Rules for Credit Risk’. By following these rules organizations can be ready today for whatever regulatory or economic changes occur in the future (revolution or not), safe in the knowledge that they don’t have to overhaul their IT systems.
‘New Rules for Credit Risk’
- Margining: The impact of clearing OTC swap transactions is huge. According to Richard McMahon, Vice-President, Energy Supply and Finance at the Edison Electric Institute, the annual cashflow impact could be between $250 million and $400 million per company. A credit department’s primary focus will need to shift from counterparty assessment to margining and collateral. This can only be achieved with robust collateral management.
- Reporting: Enterprise-wide analysis and reporting to both the company and regulator will need to be a key priority, and with the ability to be performed within minutes of a transaction. Flexible reporting will prepare for today’s uncertain fiscal and regulatory environment.
- Exposure Monitoring & Management: Monitoring cash flow risk and exposure is critical. Increasing capital requirements make it more important than ever to mitigate risk and seize opportunity. Rather than monitoring positive exposures (amounts owed to the company by counterparties), the credit function will need to monitor negative exposures (what the company owes exchanges and clearing houses).
- Analytics: Changing and uncertain times have proved that many of the basic risk analysis and measurement techniques are not adequate and companies need access to more forward looking information. Credit analytics does just that. It provides a consistent framework to forecast, evaluate, and respond to future credit events.
- Internal Scoring Don’t rely solely on credit rating agencies. Collating and managing counterparty information, and applying custom scoring techniques, is critical for any organization that wishes to protect itself from defaulting counterparties.
Don’t just cross your fingers and hope catastrophe won’t happen. Start following the rules today and safeguard your organization against credit risk failure.