Counterparty Risk assessment
7. The Authorised Person should make a suitable assessment of the risk profile of its Counterparties. The factors to be considered will vary according to both the type of credit and Counterparty such as whether the Counterparty is a company or a sovereign Counterparty and may include:
a. the purpose of the credit and the source of repayment;
b. an assessment of the skill, integrity and quality of management and overall reputation of the Counterparty;
c. the legal capacity of the Counterparty to assume the liability to the Authorised Person;
d. an assessment of the nature and amount of risk attached to the Counterparty in the context of the industrial sector or geographical region or country in which it operates and the potential impact on the Counterparty of political, economic and market changes; this assessment may include consideration of the extent and nature of the Counterparty's other financial obligations;
e. the Counterparty's repayment history as well as an assessment of the Counterparty's current and future capacity to repay obligations based on financial statements, financial trends, cash flow projections and the potential impact of adverse economic scenarios;
f. an analysis of the risk-return trade-off, with regard to the proposed price of the Credit Facility;
g. the proposed terms and conditions attached to the granting of credit, including on-going provision of information by the Counterparty, covenants attached to the facility, the adequacy and enforceability of Collateral and guarantees; and
h. the Authorised Person's existing Exposure to the individual Counterparty, sector, country or product and the availability of credit given Exposure limits.
8. An Authorised Person should document any variation from the usual credit policy.
9. An Authorised Person involved in loan syndications or consortia should not rely on other parties' assessments of the Credit Risks involved but should conduct a full assessment against its own Credit Risk policy.
10. An Authorised Person granting credit to obligors in other countries should be cognisant of the additional risks — country risk and transfer risk — involved in such credits. An Authorised Person should therefore consider the environment — economic and political — in the relevant countries, the potential effect of changes thereto on the obligors' ability to service the credit and the contagion effects in regions where economies are closely related.
11. The exception reporting should be adequately supported by a management reporting system whereby relevant reports on the credit portfolio are generated to various levels of management on a timely basis.
12. Connected Counterparties should be identified and the procedures for the management of the combined Credit Risk considered. It may be appropriate for Authorised Persons to monitor and report the aggregate Exposure against combined limits in addition to monitoring the constituent Exposures to the individual Counterparties.
13. An Authorised Person should consider whether it needs to assess the credit-worthiness of suppliers of goods and services to whom it makes material prepayments or advances.