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Credit risk is the risk of financial loss as a consequence of a counterparty's default on its payment obligations. The central government assumes credit risk in connection with interest rate swap and currency swap transactions.
The central government's credit risk is minimised by observing well-defined credit management principles:
- Swaps are transacted only with counterparties that have signed a unilateral collateral agreement
- Counterparties must have high credit ratings
- Only standardised and simple interest-rate and currency swaps are used (plain vanilla)
- The swap volume is spread across counterparties
- Swaps can be terminated if the counterparty's rating falls below a certain level (rating triggers)
- Positive and negative market values are subject to netting at counterparty level.
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