Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 10 2.4.2 Credit Risk Function To facilitate enterprise-wide credit risk assessment, measurement, and management, and to maintain efficiency, credit risk management is best performed at a corporate level and independently from the front office. The specific tasks performed at the corporate and business- unit levels may vary by company, but an overall consolidated credit risk management approach is considered best practice. (See the Credit Risk Management White Paper) Credit Risk Function ― Responsibilities and Duties • Review and approve counterparties and transactions before execution in order to identify, measure, and price the associated credit risk. • Perform due diligence on issuers of counterparty guarantees, ensuring that they meet minimum credit standards. • Coordinate review and execution of all counterparty documents with the business unit’s contract management group and the company’s office of general counsel negotiate directly with counterparties to ensure that credit risk is mitigated through contractual arrangements. • Using internal and external information sources, monitor counterparty credit events and industry/market trends for potentially adverse effects on the counterparty’s credit profile. • Calculate and report to the ROC credit exposures, credit risk metrics, and other requested information. • Report, as required by the risk policy, any credit risk limit violation, loss notification, or other exception to the limit structure. • Administer collateral (i.e., margins, parental guarantees, letters of credit held or given). 3.0 Front, Middle, and Back Offices As discussed above, to ensure independence of functional trading and marketing activities, companies should establish a three-office organizational structure. This structure ensures appropriate checks and balances and maintenance of data integrity, security, and accountability alignment. Each office has specific responsibilities and duties, many of which must be located in the office identified herein, irrespective of the strategic intent or degree of activity connected with a company’s market participation. However, certain functions present no incremental risk if located in another office or support function. These functions are highlighted and the alternative office(s) listed. 3.1 Front Office The front office (the trading group and any other party that can commit the company to a transaction) executes the company’s risk taking and risk mitigation strategies. The front office’s functions include deal execution—buying, selling, and hedging of physical commodities or financial instruments. The front office is responsible for initial capturing and logging of a