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Trading and Capital-Markets Activities Manual

Trading Activities: Counterparty Credit Risk and Pre-settlement Risk  (Continue)
Source: Federal Reserve System 
(The complete Activities Manual (pdf format) can be downloaded from the Federal Reserve's web site)

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COUNTERPARTY CREDIT RISK LIMITS 

Exposure-monitoring and limit systems are critical to the effective management of counterparty credit risk. Examiners should focus special attention on the policies, practices, and internal controls of banking institutions. An effective exposure-monitoring system consists of establishing meaningful limits on the risk exposures an institution is willing to take, independent ongoing monitoring of exposures against such limits, and adequate controls to ensure that reporting and meaningful risk-reducing action takes place when limits are exceeded. Since an effective exposure-monitoring and limit process depends on meaningful exposure-measurement methodologies, examiners should closely evaluate the integrity of these systems at institutions that may have inadequate exposure-measurement systems-especially regarding the estimation of potential future exposures. Overly conservative measures or other types of less-than-meaningful exposure measurements can easily compromise well-structured policies and procedures. Such situations can lead to limits being driven primarily by customer demand and used only to define and monitor customer facilities, instead of using limits as strict levels, defined by credit management, for initiating exposure-reducing actions. 

Limits should be set on the amounts and types of transactions authorized for each entity before execution of any trade. Distinct limits for pre-settlement and settlement risk should be established and periodically reviewed and recon-firmed. Both overall limits and product sublimits may be established. For example, a customer may be assigned a foreign-exchange trading line, while interest-rate or cross-currency swaps are approved against the general line on a transaction-by-transaction basis. In some cases, the approach to assigning sublimits reflects the pace of transactions in the marketplace as well as the amount of credit risk (largely a reflection of tenor). The sum of product-specific sublimits may well exceed the aggregate limit, reflecting management's experience that all sublimits are not used simultaneously. In such cases, however, the organization should have sufficient monitoring of global credit exposures to detect a breach of the global limit. 

The frequency with which credit exposures are monitored depends on the size of the trading and derivatives portfolios and on the nature of  the trading activities. Active dealers should have counterparty credit exposure monitored daily. Irrespective of how credit exposure is monitored, the replacement cost should be calculated daily and compared to the approved potential exposure figure for validity. 

Unusual market movements may lead to rapid accumulation of credit exposure. The creditworthiness of counterparties can also change. Between its regular reviews of credit exposures, the institution should have a mechanism that guarantees timely recognition of either unusual credit-exposure buildups or credit deterioration in a counterparty. For institutions that are dealers in these markets, the monitoring should be very frequent, and regular reviews should be conducted with the same frequency as for other significant credit customers. 

Management should have procedures for controlling credit-risk exposures when they become large, a counterparty's credit standing weakens, or the market comes under stress. Management should show clear ability to reduce large positions. Common ways of reducing exposure include halting any new business with a counterparty and allowing current deals to expire, assigning transactions to another counterparty, and restrucEagle Tradersg the transaction to limit potential exposure or make it less sensitive to market volatility. Institutions can also use many of the credit enhancement tools mentioned earlier to manage exposures that have become uncomfortably large. 

INSTITUTIONAL INVESTORS AND HEDGE FUNDS 

Examiners should pay increasing attention to the appropriateness, specificity, and rigor of the policies, procedures, and internal controls that institutions use in assessing, measuring, and limiting the counterparty credit risks arising from their trading and derivative activities with institutional investors in general, and particularly with hedge funds. In the area of counterparty assessment, institutions doing business with institutional investors and hedge funds should have sufficient information on which to assess the counterparty and its inherent risks, including information on total leverage, both on- and off-balance-sheet, and firm strategies. Banks should conduct in-depth due-diligence reviews of the effectiveness of a counterparty's risk-management systems and capabilities and its internal control environment to make effective decisions regarding the level of risk they are willing to assume. Institutions should be cautioned to obtain supporting documentation for the claims of fund managers. 

Counterparty credit risk management should emphasize comprehensive stress testing across a variety of scenarios, with particular focus on possible asset or position concentrations. Institutions should also determine the investor's or fund's ability to stress test its portfolio. In limiting counterparty credit risks through the use of collateral and other credit enhancements, it should be recognized that standard arrangements that may be suitable for most counterparties may not be suitable for counterparties that have the potential to quickly change their portfolios, such as hedge funds. For example, 12-month rolling average close-out provisions may be inappropriate for counterparties engaged in active trading, where a prior month's gains can mask serious losses in the current month. Institutions that deal with institutional investors and hedge funds should have the policies, procedures, and internal controls in place to ensure that these exposures are measured, monitored, and controlled by management on an on-going basis. 

The Basle Committee on Banking Supervision released a report that analyzed the risks posed by hedge funds to creditors and published sound practices standards for interactions with hedge funds. The sound practices standards identified areas in which bank practices could be enhanced, including- 

  establishing clear policies and procedures that define the bank's risk appetite and drive the process for setting credit standards; 
  obtaining adequate information on which to base sound judgments of counterparty credit quality; 
  performing adequate due diligence, including setting standards for risk management by counterparties that are commensurate with the level of sophistication and complexity of their activities; 
  developing meaningful limits for derivatives counterparties and more accurate measures of potential future exposure; 
  adequately assessing and measuring unsecured exposures under collateralized derivatives transactions, and setting meaningful credit limits based on such assessments;
  adequately stress testing counterparty credit risk under a variety of scenarios that take into account liquidity effects, and incorporating results into management decisions about risk taking and limit setting; 
  closely linking non-price terms, including collateral arrangements and termination provisions, to assessments of counterparty credit quality; and 
  timely monitoring counterparty transactions and credit exposures, including frequently reassessing banks' large exposures, counterparty leverage, and concentration of counterparty activities and strategies. 

UNNAMED COUNTERPARTIES 

Institutions that deal in products such as foreign exchange, securities, and derivatives sometimes face situations in which they are unaware of a counterparty's identity. Investment advisors or agents typically conduct trades on behalf of their investment-management clients and do not provide the names of the ultimate counterparty on the grounds of confidentiality. In this situation, the dealing institution will most likely never know the identity of its counterparties. 

Because institutions may not be able to assess the creditworthiness of unnamed counterparties in advance, they should develop policies and procedures that define the conditions under which such transactions can be conducted. Exposures arising from these transactions should be closely monitored and controlled. Given the potential reputational risks involved, transactions with unnamed counterparties should be restricted to reputable agents and firms. Institutions with significant relationships with investment advisors who trade on behalf of undisclosed counterparties may wish to establish agency agreements with those advisors. These agreements can provide for a series of representations and warranties from the investment advisor on a variety of issues including compliance with local and national laws and regulations, particularly on money-laundering regulations. 

Techniques used to reduce credit exposure to undisclosed counterparties include setting limits on the aggregate amount of business or on the types of instruments or transactions conducted with unnamed counterparties. In addition, institutions often pay particular attention when processing an agent's trades for an unnamed counterparty. An effective and efficient backoffice process helps to ensure that the institution is aware of the size of such exposures on a timely basis. 

Similarly, institutions often manage the settlement process with unnamed counterparties more closely than with traditional trading counterparties. Institutions often set settlement limits with unnamed counterparties so that large sums are not settled on a single day. Institutions sometimes develop procedures that ensure management is made immediately aware of settlement failures by unnamed counterparties. 

BLOCK TRADES WITH INVESTMENT ADVISORS 

Frequently, investment advisors or agents will bundle together trades for several clients, particularly in the case of mutual funds and hedge funds.2 Most of these trades are accompanied by information about how the trade should be allocated among the funds for which it was executed, or they are subject to standing allocation information. Occasionally, investment advisors may fail to give institutions timely allocation information. Institutions should be concerned that such delays do not become habitual. When significant investment advisor relationships exist, institutions should adopt policies requiring that all transactions be allocated within some minimum period (for example, by the end of the business day). The credit department should be promptly notified of any exceptions to such policies. 

Many institutions track the allocation arrangements made by investment advisors. While late allocations or frequent changes to allocation arrangements are often symptomatic of backoffice problems at the investment advisor, they could also indicate that the investment advisor is engaging in unfair allocation. 

Sometimes the allocations provided by investment advisors include counterparties that may 
not have established credit lines with the institution. Institutions should endeavor to minimize such situations and may wish to limit the percentage of any trade that can be allocated to counterparties that do not have an existing credit line with the institution. 

MANAGEMENT INFORMATION SYSTEMS 

Management information systems (MIS) used to control counterparty credit risk include systems to monitor exposure levels; track customer limits and limit excesses; and, when used, value and track collateral. Important inputs to these systems include transaction data, current market values, and estimated potential credit exposures. The primary purpose of these systems is to provide comprehensive, accurate, and timely credit information to credit-risk-management personnel, front-office personnel, business-line and other senior management, and, ultimately, the board of directors. Institutions should ensure that their credit MIS are adequate for the range and scope of their trading and derivative activities and that there are appropriate controls in place to ensure the integrity of these systems. As part of the normal audit program, internal audit should review credit MIS to ensure their integrity. 

A critical element of MIS is their timeliness in reflecting credit exposures. For derivative contracts, institutions should be able to update the current market values and potential credit exposures of their holdings throughout the life of a contract. The frequency of updates for credit-risk-management purposes often depends on the complexity of the product and the volume of trading activity. More sophisticated systems provide intraday exposure numbers that enable the front office to determine, without any additional calculations, whether a proposed deal will cause a credit excess. 

Institutions that use collateral to manage credit risk usually maintain collateral-management systems for valuation and monitoring purposes. The sophistication of an institution's collateral management system should reflect the size of the collateral program, frequency of collateral revaluations and associated credit-exposure calculations, nature of collateral-posting events, and location of the collateral. The most effective collateral-management systems are global and have the ability to identify, post, value, stress test, and monitor collateral. When collateral-management systems are able to feed data into the front-office's credit-line-availability system, an institution can factor collateral into credit-approval decisions and, consequently, have a more accurate picture of unsecured credit risk. 

Institutions often maintain databases that detail the extent to which netting is applicable for a given counterparty. Depending on whether netting is applicable, obligations are presented on a net or gross basis in credit-monitoring reports. 

Credit MIS should furnish adequate reports to credit personnel and business-line management. Daily reports should address significant counterparty line usage and exceptions to limits. Less frequent reports on the maturity or tenor of credit exposures, sector and industry concentrations, trends in counterparty exposures, trends in limit excesses, ''watch lists,'' and other pertinent reports are also appropriate. Periodic summary reports on credit exposures should also be presented to senior management and the board. 

DOCUMENTATION OF POLICIES AND PROCEDURES 

Current and sufficient documentation is critical to the effective operation of a credit-risk-management program and is necessary to ensure that the program is consistent with the stated intentions of senior management and the board. The institution's credit policy manual is an important tool for both auditors and examiners, as well as an important resource for resolving any disputes between credit-risk management and traders or marketers. 

All policies and procedures specific to credit-risk management for trading should be added to the financial institution's overall credit policy manual. Procedures should include limit-approval procedures, limit-excess and one-off approval procedures, exposure-measurement methodologies, and procedures for accommodating new products and variations on existing products. Policies should also address the methodologies for assessing credit-loss reserves for trading operations. When established, such reserves should take into account both current and potential future exposure. Credit-approval documentation should also be closely tracked by the credit-risk-management function. All limit approvals should be filed by counterparty and made available to traders so that they know the available limit to a counterparty before entering into a deal. Signed over-limit or one-off approvals should also be tracked down and kept in a file for historical records. A log should be maintained for all missing signed approvals, and approvals for new products should be maintained.

1. See section 3030.1, ''Futures Brokerage Activities and Futures Commission Merchants,'' as well as the Federal Reserve's Bank Holding Company Supervision Manual.
2. The Securities and Exchange Commission, in a number of no-action letters, has permitted this practice as long as the advisor does not favor any one client over another, has a written allocation statement before the bundled order was placed, and receives the client's written approval. See the SEC letters SMC Capital, Inc. (September 5, 1995); Western Capital Management, Inc. (August 11, 1977).

Counterparty Credit Risk and Pre-settlement Risk 

Examination Objectives 

1.To evaluate the organizational structure of the credit-risk-management function. 

2. To evaluate the adequacy of internal credit-risk-management policies and procedures relating to the institution's capital-markets and trading activities and to determine that sufficient resources and adequate attention are devoted to the management of the risks involved in growing, highly profitable, or potentially high-risk activities and product lines. 

3. To ensure that actual operating practices reflect such policies. 

4. To identify the credit risks of the institution. 

5. To determine if the institution's credit-risk-measurement system has been correctly implemented and adequately measures the institution's credit risks. 

6. To determine if the institution's credit-risk-management processes achieve an appropriate balance among all elements of credit-risk management, including both qualitative and quantitative assessments of counterparty creditworthiness; measurement and evaluation of both on- and off-balance-sheet exposures, including potential future exposure; adequate stress testing; reliance on collateral and other credit enhancements; and the monitoring of exposures against meaningful limits. 

7. To determine how the institution measures difficult-to-value exposures. 

8. To determine if senior management and the board of directors of the institution understand the potential credit exposures of the capital-markets and trading activities of the institution. 

9. To ensure that business-level management has formulated contingency plans in the event of credit deterioration and associated market disruptions. 

10. To evaluate the adequacy of the policies, procedures, and legal and operational support relating to the institution's use of credit enhancements. 

11. To determine if the institution has implemented adequate policies and procedures that are sufficiently calibrated to the risk profiles of particular types of counterparties and instruments to ensure adequate credit-risk assessment, exposure measurement, limit setting, and use of credit enhancements. 

12. To ensure the comprehensiveness, accuracy, and integrity of management information systems that analyze credit exposures and to ensure that the methodology and automated processing can accommodate netting and other legal offset agreements, if applicable. 

13. To determine if the institution's credit-risk-management system has been correctly implemented and adequately measures the institution's exposures. 

14. To determine if the institution has an effective global risk-management system that can aggregate and evaluate market, liquidity, credit, settlement, operational, and legal risks, and that management at the highest level is aware of the institution's global exposure. 

15. To determine if the institution is moving in a timely fashion to enhance its measurement of counterparty-credit-risk exposures, including the refinement of potential future exposure measures and the establishment of stress-testing methodologies that better incorporate the interaction of market and credit risks. 

16. To recommend corrective action when policies, procedures, practices, internal controls, or management information systems are found to be deficient.

Counterparty Credit Risk and Pre-settlement Risk 

Examination Procedures 

These procedures are processes and activities that may be considered in reviewing the credit-risk-management of trading and derivative operations. The examiner-in-charge will establish the general scope of examination and work with the examination staff to tailor specific areas for review as circumstances warrant. As part of this process, the examiner reviewing a function or product will analyze and evaluate internal audit comments and previous examination workpapers to assist in designing the scope of the examination. In addition, after a general review of a particular area to be examined, the examiner should use these procedures, to the extent they are applicable, for further guidance. Ultimately, it is the seasoned judgment of the examiner and the examiner-in-charge as to which procedures are warranted in examining any particular activity. 

1. Review the credit-risk-management organization. 
a. Check that the institution has a credit-risk-management function with a separate reporting line from traders and marketers. 
b. Determine if credit-risk-control personnel have sufficient authority in the institution to question traders' and marketers' decisions. 
c. Determine if credit-risk management is involved in new-product discussions in the institution. 

2. Identify the institution's capital-markets and trading activities and the related balance-sheet and off-balance-sheet instruments. Obtain copies of all risk-management reports prepared by the institution. Using this information, evaluate credit-risk-control personnel's demonstrated knowledge of the products traded by the institution and their understanding of current and potential exposures. 

3. Obtain and evaluate the adequacy of risk-management policies and procedures for capital-markets and trading activities. 
a. Review credit-risk policies, procedures, and limits. Determine whether the risk-measurement model and methodology adequately address all identified credit risks and are appropriate for the institution's activities. Review the methodologies used to measure current exposure and potential exposure. 
b. Review credit-administration procedures. 
  
  Determine how frequently counterparty credit conditions are analyzed and lines reviewed. This should be done no less frequently than annually. 
  Assess whether management has demonstrated an ability to identify downgrades in creditworthiness between reviews. 
  Determine if credit-risk-management staff demonstrate an ability to work out of positions with counterparties whose credit quality has deteriorated. 
  Check that limits are in place for counterparties before transacting a deal. If the institution relies on one-off approvals, check that the approval process is as formal as that for counterparty limits. 

c. Review contingency credit-risk plans for adequacy. 
d. Review accounting and revaluation policies and procedures. Determine that revaluation procedures are appropriately controlled. 
e. Determine the extent to which management relies on netting agreements. Determine if aggregation of exposure assumes netting, and check that netting agreements are in place and that legal research is performed to justify management's confidence in the enforceability of the netting agreements. 

4. Determine the credit rating and market acceptance of the institution as a counterparty in the markets. 

5. Obtain all management information analyzing credit risk. 
a. Determine the comprehensiveness, accuracy, and integrity of analysis. 
b. Review valuation and simulation methods in place. 
c. Review stress tests analyzing changes in credit quality, including deterioration of credit due to changing macroeconomic conditions. Review stress-testing methodologies to determine the extent to which they incorporate both credit and market risk. 
d. Review potential future exposure calculations to determine whether they reflect realistic measures of exposure in both normal and stressed markets. 
e. Determine whether the management information reports accurately reflect risks and whether reports are provided to the appropriate levels of management. 

6. Determine if any of the institution's counterparties have recently experienced credit downgrades or deteriorations and whether the institution's trading activities have been affected. If so, determine the institution's response. 

7. Review documentation that evidences credit-risk management's adherence to its program. 
a. Obtain copies of written approvals for limit excesses or one-off approvals. Determine the timeliness of these approvals. 
b. Select a sample of master agreements to ensure that each counterparty with whom management nets exposure for risk-management purposes has signed a master agreement. Review the master agreement aging report of unsigned master agreements to ensure adequate chasing procedures are in place. 

8. Establish that the institution is following its internal policies and procedures. Determine whether the established limits adequately control the range of credit risks. Determine that the limits are appropriate for the institution's level of activity. Determine whether management is aware of limit excesses and takes appropriate action when necessary. 

9. Determine whether the internal-audit and independent risk-management functions adequately focus on growth, profitability, and risk criteria in targeting their reviews. 

10. Determine whether the institution has established an effective audit trail that summarizes exposures and management approvals with the appropriate frequency. 

11. Determine that business managers have developed contingency plans which reflect actions to be taken in times of market disruption (and major credit deteriorations) to minimize losses as well as the potential damage to the institution's market-making reputation. These should include controls over the settlement process. 

12. Obtain and evaluate the adequacy of policies and procedures relating to the institution's use of credit enhancements. 
a. Review collateralization policies and procedures. 

  Determine the frequency of margin calls and portfolio and collateral revaluations. 
  Ensure that legal agreements are in place and that the fundamental aspects of collateral relationships are specified in the agreements. 
  Review the policies for determining the types of acceptable collateral, haircuts on the collateral, and margin requirements. 

b. Determine whether the institution has rehypothecation rights. Determine whether appropriate policies and procedures are in place to manage the risks associated with collateral rehypothecation. 
c. Ensure that collateral-management systems and operational internal controls are fully documented and able to support the institution's credit enhancement activity. 

13. Determine whether policies and procedures reflect the risk profiles of particular counterparties and instruments. If the institution trades with institutional investors, hedge funds, or unnamed counterparties, determine if the institution has an overall limit on trading with these types of counterparties. 

14. Determine whether appropriate policies and procedures are in place if the institution engages in block trades with investment advisors. 
a. Determine if the institution has a policy that all trades not allocated at the time of the trade must be allocated by the end of the trading day. Determine whether exceptions to such a policy are monitored by the credit area. 
b. Determine how the institution deals with investment advisors who are habitually late with allocation information. 
c. Determine whether the institution limits the percentage of a block trade that can be allocated to counterparties without credit lines. 

15. Recommend corrective action when policies, procedures, practices, internal controls, or management information systems are found to be deficient.

Counterparty Credit Risk and Pre-settlement Risk 

Internal Control Questionnaire 

1. Review the credit-risk-management organization. 
a. Does the institution have a credit-risk-management function with a separate reporting line from traders and marketers? 
b. Do credit-risk-control personnel have sufficient credibility in the institution to question traders' and marketers' decisions? 
c. Is credit-risk management involved in new-product discussions in the institution? 

2. Identify the institution's capital-markets and trading activities and the related balance-sheet and off-balance-sheet instruments and obtain copies of all risk-management reports prepared. 
a. Do summaries identify all the institution's capital-markets products? 
b. Define the role that the institution takes for the range of capital-markets products. Determine the instruments used to hedge these products. Is the institution an end-user, dealer, or market maker? If so, in what products? 
c. Do credit-risk-control personnel demonstrate knowledge of the products traded by the institution? Do they understand the current and potential exposures to the institution? 

3. Does the institution have comprehensive, written risk-management policies and procedures for capital-markets and trading activities? 
a. Review credit-risk policies and procedures. 

  Do the risk-measurement model and methodology adequately address all identified credit risks? Are the risk-measurement model and methodology appropriate for the institution's activities? 
  Do the policies explain the board of directors' and senior management's philosophy regarding illiquid markets and credit events (downgrades/deteriorations)? 

b. Review credit-administration procedures. 
  Are counterparty credit conditions analyzed and lines reviewed with adequate frequency? (This should be done no less frequently than annually.) 
  Can management identify downgrades in creditworthiness between reviews? 
  Has credit-risk-management staff demonstrated an ability to work out of positions with counterparties whose credit quality has deteriorated? 
  Are limits in place for counterparties before transacting a deal? If the institution relies on one-off approvals, is the approval process as formal as that for counterparty limits? 

c. Have limits been approved by the board of directors? 
d. Have policies, procedures, and limits been reviewed and re-approved within the last year? 
e. Are credit-risk policies, procedures, and limits clearly defined? 
f. Are the credit limits appropriate for the institution and its level of capital? 
g. Are there contingency credit-risk plans? 
h. Are there appropriate accounting and revaluation policies and procedures? 
i. Does management rely on netting agreements? 

  Does aggregation of exposure assume netting? 
  Are netting agreements in place and has legal research been performed to justify management's confidence in the enforceability of the netting agreements? 

4. Has there been a credit-rating downgrade for the examined institution? What has been the market response to the financial institution as a counterparty in the markets? 

5. Obtain all management information analyzing credit risk. 
a. Is management information comprehensive and accurate and is the analysis sound? 
b. Are the simulation assumptions for a normal market scenario reasonable? 
c. Are stress tests analyzing changes in credit quality appropriate? Are the market assumptions reasonable given credit deterioration of concentrations? Do stress-testing methodologies incorporate both credit and market risk? 
d. Are calculations of potential future exposure realistic in both normal and stressed markets?
e. Do management information reports accurately reflect risks? Are reports provided to the appropriate levels of management? 

6. Have any of the institution's counterparties recently experienced credit downgrades or deteriorations? If so, how have the institution's trading activities been affected and what was the institution's response? 

7. Review documentation that evidences credit management's adherence to its program. 
a. Does the institution maintain copies of written approvals for limit excesses or one-off approvals? Are these prepared in a timely manner? 
b. Obtain a sample of master agreements. Are they appropriately signed? Are they signed in a timely manner? Does the institution have an appropriate chasing process to follow up on unsigned master agreements? 

8. Is the institution following its internal policies and procedures? Do the established limits adequately control the range of credit risks? Are the limits appropriate for the institution's level of activity? Is management aware of limit excesses? Does management take appropriate action when necessary? 

9. Do the internal audit and independent risk-management functions adequately focus on growth, profitability, and risk criteria in targeting their reviews? 

10. Has the institution established an effective audit trail that summarizes exposures and management approvals with the appropriate frequency? Are risk-management, revaluations, and closeout valuation reserves subject to audit? 

11. If any recent market disruptions affected the institution's trading activities, what has been the institution's market response? 

12. Does the institution have comprehensive written policies and procedures relating to its use of credit enhancements? 
a. Does the institution revalue collateral and positions with adequate frequency? 
b. Are the fundamental aspects of collateral relationships reflected in legal agreements? 
c. Does the institution have policies specifying the types of acceptable collateral, haircuts on the collateral, and margin requirements? How often are these policies reviewed by management? 
d. Does the institution have rehypothecation rights?
 
  Does the institution have policies and procedures in place to manage the risk that a third party holding rehypothecated collateral may fail to return the collateral or may return a different type of collateral? 
  Does the institution have measures in place to protect its security interest in the rehypothecated collateral? 

e. Do material-change triggers and closeout provisions take into account counterparty-specific situations and risk profiles? 
f. Are the collateral-management system and operational environment able to support the institution's collateral activity? 

13. Does the institution trade with institutional investors, hedge funds, or unnamed counterparties? 
a. Does the institution place an overall limit on trading with these types of counterparties? 
b. Are credit officers aware of all cases in which a counterparty's identity is unknown? 

14. Does the institution engage in block trades with investment advisors? 
a. Does the institution have a policy that all trades not allocated at the time of the trade must be allocated by the end of the trading day? Are exceptions to the policy monitored closely by the credit area? 
b. How does the institution deal with investment advisors who are habitually late with allocation information? 
c. Does the institution limit the percentage of a block trade that can be allocated to counterparties without credit lines? 

15. Do policies and procedures generally reflect the risk profiles of particular counterparties and instruments?

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