3.2 INCEPTION

The inception of a trade takes place in front-office units such as sales, structuring and trading desk (see Figure 3.2). They study their customers’ needs and risk appetite, and assess the market potential and the viability of the trades. Once they see and grab a market opportunity, the trade is born.

After these inception steps are completed, the trade goes through the pre-booking approval processes. It needs a green light from the credit controllers, who worry about the extent of the counterparty credit exposure arising from it. They also monitor the credit limits allocated to the counterparties and their usage. The counterparty credit control team uses historical data, internal and external credit rating systems and their own quantitative modelling prowess to come up with counterparty credit limits and maximum per trade and netted exposures.

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Figure 3.2 Trade origination and inception processes and activities. The main activities at the inception stage are pricing and credit approval. The trade is booked into the database during inception

Big Picture 3.1: Collateral versus Credit Lines

Consumer banks manage credit risk using two distinct paradigms – through collateral management or through credit line allocation. In the consumer credit market, these paradigms correspond to secure lending (such as automobile financing or home mortgages) and unsecured loans (e.g. ...

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