Credit Control

Credit control in the foreign exchange market involves managing credit risk, which is the risk that a counterparty will default on its obligations. Credit risk is a significant risk in the foreign exchange market, where trades involve significant sums of money and can involve multiple counterparties.

Credit control in the foreign exchange market involves several key activities:

Credit Assessment: The first step in credit control is to assess the creditworthiness of counterparties before entering into transactions with them. This involves reviewing their financial statements, credit ratings, and other relevant information to determine the likelihood of default.

Credit Limits: Once the creditworthiness of a counterparty has been assessed, credit limits are set based on the level of credit risk associated with the counterparty. Credit limits are typically set based on factors such as the size of the counterparty, the nature of the transaction, and the creditworthiness of the counterparty.

Collateral Management: Collateral is often used in the foreign exchange market to mitigate credit risk. Collateral is a financial asset that is pledged as security for a loan or other financial transaction. The credit control function is responsible for managing collateral, including valuing collateral, monitoring collateral levels, and calling for additional collateral if necessary.

Credit Monitoring: The credit control function monitors the credit exposure of the financial institution to its counterparties on an ongoing basis. This involves monitoring credit limits, collateral levels, and the creditworthiness of counterparties. Credit Mitigation: The credit control function implements strategies to mitigate credit risk, such as diversifying credit exposure, using netting arrangements to reduce exposure, and implementing credit risk transfer strategies such as credit default swaps.