Credit risk refers to the loss caused by the default of the counterparty of the financial transaction. The State Treasury manages the credit risk arising from cash investments and derivatives by means of limits, and increasingly by securitized derivative contracts. The government requires its counterparties to have a high credit rating.
The credit risk of derivatives is reduced with the aid of collateral. Finland has CSA collateral agreements (Credit Support Annex) with all of its counterparties under the framework of its ISDA master agreements. The counterparty in the collateral arrangements supplies bonds or cash as collateral for the government’s receivables. The government’s collateral agreements are unilateral and the obligation to provide collateral applies only to the bank acting as the counterparty. To reduce the credit risk associated with cash investments, short-term investments have been made more recently in notes of certain EU countries.