Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 35 • To better understand the inherent risks in specific portfolios, risk metrics such as VaR, CFaR and EaR should be calculated using varying horizons and methods that are appropriate to measure and analyze the risk. • Simulations that forecast how a portfolio would perform under stress conditions should be performed regularly. • The middle office should report risk exposure on a daily basis at the transaction, portfolio, business unit, and corporate levels. • Liquidity risk should be managed through VaR, CFaR, notional limits, and accounting reserves. • No single position should exceed a given percentage of the VaR without approval of the ROC. Key Reports • Position reports. • P&L reports. • Limit compliance reports. • MTM reports. • Greek exposure reports. • VaR reports. 1.3.4 Credit10 Process Overview The credit process can be broken into establishing credit and limits and monitoring exposure. Before accepting a new counterparty, the credit department must analyze the party’s profile and set a limit on the amount of activity the company is willing to transact with that counterparty, based on risk tolerances. Once the limit is established, the department should monitor credit exposure throughout the day. If the credit exposure amount exceeds the counterparty credit limit, the credit department should verify the limit violation and then notify credit management and front-office senior management so that a corrective action can be sought. In addition to monitoring exposure and limits, the credit department should calculate and analyze various credit risk metrics to better understand the current and potential risks in the portfolio. Objectives • Establish credit tolerances for the company. • Evaluate all counterparties that do business with the company and establish appropriate limits for each. 10 See the Credit Risk Management White Paper for a full description of credit best practices.