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Accounting for Financial Instruments - Final Audit Report ... - EDC

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3. Collateral PositionsAs outlined in the Risk and Capital Management Policy, collateral agreements are used by <strong>EDC</strong> tomanage excess concentrations of counterparty credit risk. Under the terms of the agreements, whenexposure with a counterparty surpasses an agreed upon threshold, collateral must be posted by thecounterparty with an independent third party. It is the responsibility of MRM to calculate counterpartycredit risk positions and make collateral calls when predefined limits are exceeded. Treasury <strong>Accounting</strong>uses collateral positions in determining the CVA value to calculate the fair value of derivatives. Wefound that monitoring of counterparty positions against limits is per<strong>for</strong>med by one employee and is notsubject to review/approval. In addition, we found that <strong>EDC</strong> and the counterparty may have a differentcalculation of the outstanding position, and there<strong>for</strong>e disagree that collateral needs to be posted orreturned. In these situations, <strong>EDC</strong>’s decision to accept the counterparty’s calculation is not subject tointernal oversight/approval.We have recommended that thresholds be established beyond which an officer should escalatecounterparty refusals to post collateral. We have also recommended that MRM implement a monitoringcontrol to review trade day positions against limits <strong>for</strong> each counterparty.Rating of <strong>Audit</strong> Finding - ModerateAction Owner – Director, Market Risk ManagementDue Dates - All actions to be implemented by Q2 20134. Counterparty Risk Rating ReviewsAs outlined in the Risk and Capital Management Policy, the credit quality of all counterparties must bereviewed at a minimum on an annual basis. Further, the policy states that event driven reviews (i.e.downgrades by rating agencies) of credit commitments should occur. The MRM team is responsible <strong>for</strong>scheduling and completing these regular counterparty credit reviews, as well as conducting ongoingmonitoring of a counterparties’ creditworthiness. Counterparty risk ratings have a direct impact on thecollateral program, and the CVA calculation.Through our detailed testing, we found that documentation of the annual counterparty reviews and eventdriven credit rating changes was not always consistently maintained. In addition, there is no process inplace <strong>for</strong> a second review/approval of counterparty credit reviews. Accordingly, we per<strong>for</strong>med detailedtesting to verify the accuracy of counterparty credit ratings. No discrepancies were found. We haverecommended that annual and event driven credit reviews <strong>for</strong> counterparties be reviewed and approved.Rating of <strong>Audit</strong> Finding - ModerateAction Owner – Director, Market Risk ManagementDue Dates - All actions to be implemented by Q3 2013ConclusionThe audit findings and recommendations have been communicated to and agreed by management, whohas developed action plans that are scheduled <strong>for</strong> implementation no later than Q3 2013. We would liketo thank management <strong>for</strong> their support throughout the audit.<strong>Accounting</strong> <strong>for</strong> <strong>Financial</strong> <strong>Instruments</strong> 5

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