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  • Chapter RM-2 Chapter RM-2 Counterparty Risk

    • RM-2.1 RM-2.1 Counterparty Risk

      • RM-2.1.1

        Investment firm licensees must document in a credit policy their policies and procedures for identifying, measuring, monitoring and controlling counterparty risk. This policy must be approved and regularly reviewed by the Board of Directors of the licensee.

        Adopted: July 2007

      • RM-2.1.2

        Among other things, the licensee's credit risk policy must identify the limits it applies to both individual counterparties and categories of counterparty, how it monitors movements in counterparty risk and how it mitigates loss in the event of counterparty failure.

        Adopted: July 2007

      • RM-2.1.3

        A licensee's credit risk policy should provide a clear indication of the amount and nature of counterparty risk that the licensee wishes to incur. In particular, it should cover:

        (a) How, with particular reference to its activities, the licensee defines and measures credit risk;
        (b) The types and sources of counterparty risk to which the licensee wishes to be exposed (and the limits on that exposure) and those to which the investment firm licensee wishes not to be exposed (and how that is to be achieved, for example how exposure is to be avoided or mitigated); and
        (c) The level of diversification required by the licensee and the licensee's tolerance for risk concentrations (and the limits on those exposures and concentrations).
        Adopted: July 2007

      • RM-2.1.4

        It is important that sound and legally enforceable documentation is in place for each agreement that gives rise to counterparty risk as this may be called upon in the event of a default or dispute. A licensee should therefore consider whether it is appropriate for an independent legal opinion to be sought on documentation used by the licensee. Best practise would dictate that documentation should normally be in place before the licensee enters into a contractual obligation or releases funds.

        Adopted: July 2007

      • Risk Monitoring

        • RM-2.1.5

          Investment firm licensees must implement an effective system for monitoring counterparty risk which should be described in a credit risk policy.

          Adopted: July 2007

        • RM-2.1.6

          Investment firm licensees must meet the Counterparty Risk Requirements in Module CA-3.3. The licensee must monitor its exposures and must notify the CBB if its total exposure to an individual counterparty exceeds 25% of aggregate counterparty exposures and/or 25% of the licensee's regulatory capital.

          Adopted: July 2007

        • RM-2.1.7

          Individual credit facilities and overall limits should be periodically reviewed, in order to check their appropriateness for both the current circumstances of the counterparty and the firm's current internal and external economic environment. The frequency of review should be appropriate to the nature of the facility, but in any event should take place at least once a year.

          Adopted: July 2007

      • Record Keeping

        • RM-2.1.8

          Investment firm licensees must maintain appropriate records of:

          (a) Counterparty exposures, including aggregations of individual counterparty exposures, as appropriate, by:
          (i) Groups of connected counterparties;
          (ii) Types of counterparty as defined, for example, by the nature or geographical location of the counterparty;
          (b) Investment decisions, including details of the decision and the facts or circumstances upon which it was made; and
          (c) Information relevant to assessing current counterparty and risk quality.
          Adopted: July 2007

        • RM-2.1.9

          For the purposes of this Module, connected counterparties means all undertakings with which the licensee has close links; the Directors (and their family) of the licensee; and the Directors (and their family) of undertakings with which the licensee has close links.

          Adopted: July 2007