Review of Counterparty Credit Risk

As part of our annual audit plan, we reviewed the process for ensuring that counterparty credit analysis is performed and monitored. We identified issues related to the cultural factors affecting the credit risk monitoring process, performance of initial credit analysis, and monitoring of counterparty creditworthiness. Specifically, we determined that Corporate Credit has historically lacked authority to determine which counterparties require a credit analysis and when performance assurance is required. Because of the lack of a central, governing body, the process has become siloed with business units establishing their own criteria for requiring a credit analysis and deciding whether to implement Corporate Credit's recommendations. As a result, we identified counterparties that met the business unit's (BU) guidelines or Corporate Credit's expectations of requiring a credit review, but a request for credit analysis was not made by the business unit. We also identified issues related to lack of documentation supporting the credit analysis and the counterparty creditworthiness monitoring processes. In addition, we determined that Corporate Credit relies heavily on commercial credit ratings in both initially determining and monitoring a counterparty's creditworthiness.The credit analysis, performance assurance, and monitoring processes were not always performed timely. Specifically, we identified (1) BU requests for credit analysis made either less than one week prior to or after the contract start date; (2) credit memos dated after the contract date; (3) financial analyses conducted with outdated financial statements; (4) contracts executed with outdated credit memos; and (5) contract-required performance assurance not obtained in a timely manner. In addition, we determined that active counterparties were not being consistently monitored. Treasury agreed with all of the recommendations, with the exception of one related to the monitoring of the BU activity by Corporate Credit to ensure compliance with the Credit Standard Program and Processes and specific BU policies related to counterparty credit risk management. The OIG revised the report and recommendations, as necessary, to address the disagreement. Summary Only