Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 36 • Quantify the credit risks of the portfolio. • Protect the company against credit risk for counterparties with bad credit ratings, poor payment history, or risk of insolvency. • Maintain credit exposures within acceptable parameters. • Analyze the potential portfolio impact of changes to a counterparty. • Provide the means to react to changing market and counterparty conditions. • Provide a sound internal control environment, with separation of duties between the front-office creation of a deal and the verification of the counterparty by the credit department. • Integrate credit risk management for the energy trading and marketing function with the enterprise-wide credit function. Best Practices and Controls • A corporate-wide credit policy should be established and approved by the ROC. This policy should provide guidance on risk tolerance. It should include processes for establishing and approving limits, methods for ensuring that contracts have adequate credit protection, and procedures for monitoring exposure, maintaining collateral, and obtaining exceptions. • Ratings should be established for all counterparties, and appropriate limits (including concentration limits) should be set. • Acceptable collateral should be negotiated up front and maintained throughout the duration of the contract. • Before deal execution, contract terms should be reviewed and approved by corporate risk management to ensure that the credit risk can be managed adequately. • Master netting agreements (including margining provisions) and multilateral clearing platforms should be used when possible to minimize credit exposure. • Credit exposure by counterparty should be calculated and reported at least once a day. This should include A/R, A/P, unbilled revenues, and MTM gains and losses on all positions. • New trades should be monitored throughout the day to ensure compliance with limits. • Credit limit violations should be reported immediately to the CRO and the front office. • At least twice a year, periodic reviews of limits should be performed to assess whether changes should be made. • News articles, bankruptcy filings, legal actions, etc., should be monitored on a daily basis for all established counterparties. • Appropriate credit reserves should be calculated and recorded monthly.