Existing business

Compliance cannot realistically control every transaction nor all activities. The focus
of resources must be driven by a cost/benefit analysis of where the highest probability
of risk and loss might occur. Table 17.1 indicates the situations where one may likely
have a greater risk than normal. Well-established clients using standard products
for true risk-reducing purposes is probably not a problem area. Other variations
appear to have a greater likelihood of problems.
Table 17.1 Analysis of risks
Derivative Customer Oversight
Plain vanilla swap New Medium
Established Low
Government entity High
Swaption/options sold to client New Low
Established Low
Government entity High
Swaption/options purchased from client New High
Established Medium
Government entity High
Semi-liquid/new instrument type New High
Established High
Government entity High
One should monitor credit exposure and documentation aging schedules. Specific
attention should be paid that documents are appropriately signed (certificate of
incumbency) and not altered and or simply initialed. Option expiry/exercise notices
also merit a ‘tickler system’. The pricing methodologies of some options may make it
difficult to value but one should be at least alerted to the possibility of exercise.