Energy Credit Best Practices – Chapter: Information Technology http://ccro.org © Copyright 2022, CCRO. All rights reserved. 20 operationally. Usually, this approach involves assuming both deliveries before but not yet invoiced, Balance of the Month Exposure (BalMo), and invoice’s payment. There is nothing wrong with using this type of “operational” view of exposure. For example, calculating the rolling 60-day Credit Exposure window is common practice in the oil and gas industry. These calculations are a reasonable proxy most of the time. Still, they usually differ from what a company would be owed or owe in the event of an actual counterparty default. Depending to what extent the company is obligated to continue to deliver through a default. Therefore, the practice of calculating multiple “looks” at exposure is recommended, given the capabilities and low cost of today’s computing power. • Functionality - Thoughtfully choose the tools that your company implements as part of its credit policy and understand those tools' strengths and weaknesses. The alphabet soup of analytics that can be used, combined with the decreasing cost of computing power, can make it seem attractive to implement everything. However, more is not always better. The more metrics that a credit analyst is exposed to, the less attention they will pay to the critical ones. Therefore, evaluate the needs of your company based on the risks present in the portfolio. Then determine the best measures for your organization to take and predictively mitigate those risks. For example, the accurate calculation of a credit reserve amount is more important (in terms of remaining solvent) for a smaller company in a middleman trading position than for a larger company originating some commodity with $1 billion of cash on hand. This does not mean it is bad for the large company to calculate its credit reserve. But they should probably be more focused on Potential Future Exposure (PFE) limits and PFE change day-over-day in total and Book Value. Conversely, this does not mean the small company should not be calculating PFE, but knowing about potential future issues is not relevant if you cannot survive a default today. • Reassessment - Impose a regularly scheduled review to ALL exceptions to the credit policy at some interval that makes sense. This applies especially to exceptions that have been implemented in a system as they may escape notice. Ideally, each exception's review period should also be coded into the system in the same way that the exception itself is coded. For example, if a trade is ignored when importing exposure, add some automated notification/workflow/message to review the logic behind neglecting it. This practice helps preserve institutional knowledge and mitigates the risk associated with shift changes, staff turnover, and the business's general press. • Audit-ability: Do not allow non-audited Credit Exposure adjustments of any kind.