Guidance on Internal Processes
We recommend that in addition to regulatory compliance features ensured by PrevioRisk modules, our clients implement the following system infrastructure considerations, based on your organization’s internal processes:
- Senior management should have access to timely, accurate and comprehensive CCR reporting metrics.
- Internal capital adequacy models should incorporate CCR.
- Banking organizations should maintain a systems infrastructure that support adequate CCR management. This can be achieved by:
- Deploying adequate operational resources to support reconciliations and related analytical and remediation processes.
- Reconciling positions and valuations with counterparties. Large counterparties should perform frequent reconciliations of positions and valuations (daily if appropriate).For smaller portfolios with non-dealer counterparties where there are infrequent trades, large dealers should ensure the data integrity of trade and collateral information on a regular (but not necessarily daily) basis, reconciling their portfolios according to prevailing industry standards.
- Reconciling exposure data in CCR systems with the official books and records of the financial institution.
- Maintaining controls around obligor names at the point of trade entry, as well as reviews of warehoused credit data, to ensure that all exposures to an obligor are captured under the proper name and can be aggregated accordingly.
- Maintaining quality control over transfer of transaction information between trade capture systems and exposure measurement systems.
- Harmonizing netting and collateral data across systems to ensure accurate collateral calls and reflection of collateral in all internal systems. Banking organizations should maintain a robust reconciliation process, to ensure that internal systems have terms that are consistent with those formally documented in agreements and credit files.
- Removing promptly any systems weaknesses that raise questions about the appropriateness of the limits structure. If there are a significant number of limit excesses, this may be a symptom of system weaknesses, which should be identified and promptly remediated.
- Eliminating or minimizing backlogs of unconfirmed trades.
- Increasing automation of margin processes and expanding automation of OTC derivatives post-trade processing. This should include automation of trade confirmations, to reduce the lag between trade execution and legal execution.
- Maintaining default monitoring processes and systems.
- Reviewing the use of add-on methodologies at least annually. Current or planned significant trading activity should trigger efforts to develop appropriate modeling and systems, prior to or concurrent with these growth plans.
- Establishing growth limits for products with material activities that continue to rely on add-ons. Once systems are improved to meet a generally accepted industry standard of trade capture, these limits can be removed.