This credit policy approach is consistent across industries, but the complexity is dependent on the activity involved. The policy should detail how limits are set for these exposure types and how the exposures are managed.
* (2,3) This should include Concentration limits for exposures to related entities. All parent and subsidiaries relationships should have an aggregate group limit as well individual entity limits.
Note the following:
Credit ratings – If this involves financial trading firms, each counterparty type should have a rating range. For instance, a prop trading firm would be in the higher credit risk range while banks would be in the lower credit risk range dependent on their size and credit profile.
Measuring credit risk – for financial trading firms, (3) Credit Control includes measuring credit risk which involves calculating an expected loss based on the counterparty’s probability of default combined with the volatility and liquidity of the individual trades.
… For instance, for derivatives trading there are different types of credit exposures: settlement risk, depository risk and potential exposure (e.g. how the market may move against these derivatives positions).