GE 2006 Annual Report Download - page 105

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Counterparty credit risk
We manage counterparty credit risk, the risk that counterparties
will default and not make payments to us according to the terms
of the agreements, on an individual counterparty basis. Thus,
when a legal right of offset exists, we net certain exposures by
counterparty and include the value of collateral to determine the
amount of ensuing exposure. When net exposure to a counter-
party, based on the current market values of agreements and
collateral, exceeds credit exposure limits (see following table), we
take action to reduce exposure. Such actions include prohibiting
additional transactions with the counterparty, requiring collateral
from the counterparty (as described below) and terminating or
restructuring transactions.
Swaps are required to be executed under master agreements
containing mutual credit downgrade provisions that provide the
ability to require assignment or termination in the event either
party is downgraded below A3 or A–. In certain cases we have
entered into collateral arrangements that provide us with the
right to hold collateral (cash or U.S. Treasury or other highly-rated
securities) when the current market value of derivative contracts
exceeds a specified limit. We evaluate credit risk exposures and
compliance with credit exposure limits net of such collateral.
Fair values of our derivatives assets and liabilities represent
the replacement value of existing derivatives at market prices
and can change significantly from period to period based on,
among other factors, market movements and changes in our
positions. At December 31, 2006, our exposure to counterparties,
after consideration of netting arrangements and collateral, was
about $1,400 million.
    
Following is GECS policy relating to initial credit rating
requirements and to exposure limits to counterparties.
COUNTERPARTY CREDIT CRITERIA
Credit rating
Moody’s S&P
Foreign exchange forwards and other
derivatives less than one year P–1 A–1
All derivatives between one and fi ve years Aa3(a) AA–(a)
All derivatives greater than fi ve years Aaa(a) AAA(a)
(a) Counterparties that have an obligation to provide collateral to cover credit exposure
in accordance with a credit support agreement must have a minimum A3/A–rating.
EXPOSURE LIMITS
(In millions)
Minimum rating Exposure
Without
With collateral collateral
Moody’s S&P arrangements arrangements
Aaa AAA $100 $75
Aa3 AA– 50 50
A3 A– 5 —
(a)
(a) For derivatives with maturities less than one year, counterparties are permitted to
have unsecured exposure up to $150 million with a minimum rating of A–1/P–1.
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