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Disclaimer - New Zealand Debt Management Office Web Site
- The information on this web site is issued by the New Zealand Debt Management Office (NZDMO) for informational purposes. It does not contain and is not an invitation or offer to buy or sell securities. Insofar as this web site refers to any offerings of securities, such offerings are directed to countries other than the United States and no offerings are made to persons accessing this web site within Australia.
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Disclaimer: The information on this web site is issued by the New Zealand Debt Management Office (NZDMO) for informational purposes. It does not contain and is not an invitation or offer to buy or sell securities. Each page on this web site must be read in conjunction with the disclaimer at http://www.nzdmo.govt.nz.
Credit Risk
Page updated 12 Dec 2007
Credit risk refers to the risk of a counterparty failing to discharge an obligation.
Credit losses arise when NZDMO is required to find a transaction counterparty to replace one that is no longer of acceptable credit quality. In finding a suitable replacement, NZDMO would incur transaction costs and potentially suffer a loss in the market value of the original transaction. Credit losses also arise when the issuer of a financial obligation that NZDMO holds as an asset is downgraded or defaults.
Financial instruments that subject NZDMO to credit risk include bank balances, advances, investments, interest-rate swaps, currency swaps and foreign-exchange forward contracts. NZDMO manages credit risk through the use of credit exposure limits. Credit exposures are maintained only with highly rated institutions for which the probability of default is low. To diversify credit exposure, NZDMO limits its exposure to any one institution. The creditworthiness of counterparties is continuously monitored. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and foreign-exchange counterparties.Collateral
For swaps and foreign-exchange contracts transacted under NZDMO’s customised International Swaps and Derivatives Association (ISDA) swap documentation, collateral is required when the mark-to-market exposure exceeds the credit exposure limit for a counterparty.
Settlement Exposure
The settlements process involves the receipt and payment of funds and securities, and default by a settlement agent would result in NZDMO being unable to make or receive payments with that agent.
The nature of NZDMO’s business is such that large amounts may be settled on one day. For that reason, monetary limits are not placed on NZDMO’s exposure to transaction banks, custodians, fiscal agents and clearing brokers. Risk in respect of those institutions is managed through procedures for selecting and monitoring transaction settlement agents.