Credit risk refers to the loss caused by the default of the counterparty of a financial transaction. For the State Treasury, credit risk results from investment of cash funds and use of derivatives.
The State Treasury manages the credit risk arising from cash investments and derivatives by requiring high credit ratings of its counterparties and setting counterparty limits. The State Treasury also places funds via collateralised investments in the form of triparty repo transactions.
The State Treasury uses collateral agreements to mitigate credit risk resulting from derivative transactions. The central government has CSA collateral agreements (Credit Support Annex) with all of its counterparties under the framework of ISDA agreements. The counterparty in the collateral arrangements supplies bonds or cash as collateral for the government’s receivables. The government’s collateral agreements have been unilateral and the obligation to provide collateral has applied only to the counterparty bank. The State Treasury has started a project with the aim of entering into two-way CSAs with its derivative counterparties.