Skip to main content

For updates and guidance related to COVID-19 / Coronavirus, click here.

Credit Risk Management

Regulatory Obligations and Related Considerations


Regulatory Obligations

Under the financial responsibility rules, and related supervisory obligations, firms need to properly capture, measure, aggregate, manage and report credit risk, including risk exposures that may not be readily apparent. Such responsibility can be incurred under clearing arrangements, prime brokerage arrangements (especially fixed income prime brokerage), “give up” arrangements, sponsored access arrangements (discussed above in the Market Access section) or principal letters. Further, firms should maintain a robust internal control framework where they manage credit risk and they identify and address all relevant risks covering the extension of credit to their customers and counterparties. Weaknesses within the firm's risk management and control processes could result in a firm incorrectly capturing its exposure to credit risk.

Related Considerations

  • Does your firm maintain a robust internal control framework to capture, measure, aggregate, manage, supervise and report credit risk?
  • Does your firm review whether it is accurately capturing its credit risk exposure, maintain approval and documented processes for increases or other changes to assigned credit limits and monitor exposure to affiliated counterparties?
  • Does your firm have a process to confirm it is managing the quality of collateral and monitoring for exposures that would have an impact on capital?

Exam Observations and Effective Practices


Exam Observations

  • No Credit Risk Management Reviews – Not evaluating firms’ risk management and control processes to confirm whether they were accurately capturing their exposure to credit risk.
  • No Credit Limit Assignments – Not maintaining approval and documentation processes for assignment, increases or other changes to credit limits.
  • No Monitoring Exposure – Not monitoring exposure to firms’ affiliated counterparties.

Effective Practices

  • Credit Risk Framework – Developing comprehensive internal control frameworks to capture, measure, aggregate, manage and report credit risk, including:
    • establishing house margin requirements;
    • identifying and assessing credit exposures in real-time environments;
    • issuing margin calls and margin extensions (and resolving unmet margin calls);
    • establishing the frequency and manner of stress testing for collateral held for margin loans and secured financing transactions; and
    • having a governance process for approving new, material margin loans.
  • Credit Risk Limit Changes – Maintaining approval and documentation processes for increases or other changes to assigned credit limits, including:
    • having processes for monitoring limits established at inception, and on an ongoing basis, for customers and counterparties;
    • reviewing how customers and counterparties adhere to these credit limits, and what happens if these credit limits are breached; and
    • maintaining a governance structure around credit limit approvals.
  • Counterparty Exposure – Monitored exposure to their affiliated counterparties, considering their:
    • creditworthiness;
    • liquidity and net worth;
    • track record of past performance (e.g., traded products, regulatory history, past arbitration and litigation); and
    • internal risk controls.

Additional Resources