Limits are set by an entity in order to manage and control its risks. Counterparty limits restrict the risk exposure to a particular counterparty. They are set so as to reduce the loss that could arise if the counterparty were to default on its obligations. They should reflect the credit quality of the counterparty to the transactions, the company’s own capital adequacy, operations efficiency, credit expertise, the efficiency and reliability of the settlement systems and the period of time for which the exposure will be outstanding. Examples of counterparty limits are the pre-settlement risk (PSR) limit and the settlement risk limit.
- Setting up counterparty limits, market risk limits & Liquidity and Interest rate risk limits
- Calculating Value at Risk (VaR)