Within SAP’s Treasury and Risk Management modules are three analyzers: Market Risk Analyzer, Credit Risk Analyzer, and Portfolio Analyzer. In this article, I focus on Credit Risk Analyzer.

SAP’s Credit Risk Analyzer module is used to measure, analyze, and attempt to control counterparty default risk. Counterparty default risk refers to the possible loss arising should a counterparty not fulfill its trade-related contractual obligations. An example is a company that has a direct investment (e.g., time deposit or CD trade, with a counterparty or bank to pay interest and repayment of principal at the maturity of the trade, and the bank is unable to make the payment). Counterparty risks are subdivided into credit risk and settlement risk. Credit risks exist over the complete life of the transactions. Settlement risks only exist during the settlement period of the transactions. The module provides a limit utilization (exposure) report that is available in both real time and in an end-of-day report across banks showing the risk exposure to different counterparties or banks.

Prerequisites

The functionality described in this article is included in SAP ERP Central Component (ECC), though licensing may be required to use the SAP Treasury and Risk Management module. To make full use of the Credit Risk Analyzer module, SAP Treasury or Cash Management should be implemented.

Before going through the article, I recommend that you review the definitions in the “Key Terms” sidebar.

Credit Risk Analyzer Application-Side Processing

In this section, I look at the application-side processing of Credit Risk Analyzer. Later, I walk you through a step-by-step guide to configuration in the “How to Configure Credit Risk Analyzer” section.

The primary purpose of using the Credit Risk Analyzer module is for a company to attempt to manage counterparty risk. This is done by setting various limits and tracking the limit utilizations on a daily basis. The Credit Risk Analyzer utilization reports show the high-level limit utilizations, which are the risk exposures to counterparties or banks, as well as the detail of trades and bank accounts that make up that exposure. In addition, it is possible to validate that credit limits are not exceeded in real time as the trades are entered into the SAP system.

For example, company XYZ is a global company running SAP software. Company XYZ does business with multiple branches at various global banks. Company XYZ has bank accounts, does investments, and executes derivative trades for hedging purposes with multiple global banks. The company wants to diversify its exposure across each global bank and uses SAP’s Credit Risk Analyzer to help manage its counterparty risk.

The treasury department at company XYZ wants to track its counterparty risk limits on a global (parent) bank basis, as opposed to tracking the limits on a specific branch basis. For example, company XYZ does business with the branch offices in New York, Geneva, and Mumbai at three global banks—Bank 1, Bank 2, and, Bank 3, as shown in Figure 1. Credit Risk Analyzer considers the business partner relationships set up in the SAP system. For example, if a branch-level business partner has a relationship in the SAP system of “is subsidiary of” a group-level business partner, the risks for the branch-level business partner are reported with the group-level business partner. Credit Risk Analyzer enables companies to monitor their exposures to banks or counterparties.

Figure 1

Counterparty risk tracked at the group level

In my use case scenario I assume that company XYZ has the following restrictions to control counterparty risk:

1. For each global bank, company XYZ wants to limit its counterparty exposure to no more than $40 million at any point in time. Total credit risk for each group bank should not exceed $40 million.
2. Within the $40 million per counterparty at the group level, investment trades should not exceed $10 million. Bank account balances should not exceed $5 million. Derivative trades should not exceed $25 million. The derivative exposure may include foreign exchange (FX), interest rate, or commodity trades.
3. The limits should be on the market value net present value (NPV) of the trades.

The limit type characteristics for my use case scenario are group business partner and limit product group. This means the limits are specified by business partner or bank and limit product group (investments, cash accounts, and derivatives).

Once Credit Risk Analyzer is up and running, the daily maintenance is minimal. Table 1 shows the master data steps that are involved in maintaining Credit Risk Analyzer in production. These steps need to be done when new counterparty business partners are created.

Table 2 shows the program steps involved in maintaining Credit Risk Analyzer in production.

Create Limits

The first step in using the Credit Risk Analyzer is to define limits. This step is similar to master data and needs to be done only when new counterparty business partners or bank accounts at new banks are created in an SAP system.

Creating limits is done using transaction code TBL1 or by following menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Master Data > Limits > Maintain. This path takes you to the screen shown in Figure 2.

Figure 2

Create a group business partner limit

Select the limit to be created and click the create icon . In the pop-up screen shown in Figure 3 enter the business partner in the BusPartner field and the limit (product) group (e.g., investments [INV], derivatives [DER], or cash balances [CSH] in the Limit Group field. Then click the enter icon .

Figure 3

Enter limit characteristics

This action opens the screen shown in Figure 4.

Figure 4

Enter investment limit information

In Figure 4, enter the details of the limit.

The following fields are relevant to creating a limit:

• Valid From Date should be set to the date the limit goes into effect.
• Valid To date should be set to the end date of the limit.
• The internal limit fields relate to the actual limits. These may hold some padding, meaning the internal limits may be higher than the external limits. The external limits are softer limits that may be communicated outside the treasury department. Therefore, the external limit fields should be set as equal to or more restrictive (lower) than the internal limit fields.
• The Critical Limit Utilizat. (critical limit utilization) field gives the system a percentage range above which the early warning control should generate a warning message. For example, if the limit utilization is 90 percent utilized, a warning message is triggered letting the user know that the limit is close to being fully utilized.
• The Max. Risk Commit Per.Mth (maximum risk commitment per month) field is the maximum expected term of trade in months. If the term of the trade exceeds this amount of time (in months), a warning message is triggered at trade entry. Set the field to 12 assuming the investment trades will not exceed one year.
• If you want to check against the limit, you must set the value of the Limit parameter to Check. Set the field to Check.

When you finish populating these fields, click the save icon . This action generates the following message: Limits for limit type GRP have been changed.

Now you enter the cash balance and derivative limit information for each counterparty bank. In the screen shown in Figures 5, enter CSH (cash operating balances) in the Limit Group field and populate the Internal Limit Amnt (internal limit amount) and External Limit Amnt (external limit amount) fields as shown. Click the save icon to save your data.

Figure 5

Enter cash balance limit information

In Figure 6 enter DER (derivative trades) in the Limit Group field. Populate the Internal Limit Amnt and External Limit Amnt fields as shown and click the save icon to save your entries.

Figure 6

Enter derivative limit information

Releasing Limits

I assume the limits are set to be released. After you enter the limits, the next step is to release the limits. The releasing of limits must be done by a user other than the user who created or changed the limits. Activating the release is a way to prevent unauthorized changes to the limits. Therefore, I recommend that you activate the release. When you configure settings to define a limit type, you specify if releasing of limits is required. See the “Define Limit Types” section for more information.

To release limits execute transaction code TBLR or follow menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Master Data > Limits > Release > Limits. This path takes you to the screen shown in Figure 7. To release all unreleased limits, go to the Selection of Limits section and select the indicators as shown in Figure 7. Click the execute icon .

Figure 7

Mass releasing limits input screen

The Release column of the next screen (Figure 8) shows the limits that are Flagged, meaning they require release. Click the Select all button, click the Release button, and then click the save icon. (Note: Don’t forget to click the save icon. This step is often missed.)

Figure 8

Mass releasing limits output screen

Now you see the following message: Release changes saved successfully. This message indicates that the limits have now been released.

Note
If the release step is done by the user who created or modified the limits, you see messages similar to the ones displayed in Figure 9.

Figure 9

Dual control on release messages

If a bank becomes financially distressed, there is a risk the company may not recover the portion of the balances in the bank accounts that are not FDIC insured. For this reason, the bank account balances should be reflected in the counterparty risk numbers. Running the Link to Cash Management program incorporates the cash balances as exposures into the limit utilizations by creating financial objects for the cash balances at external banks. (The amount of the cash balances is taken from the corresponding cash balance general ledger (G/L) accounts, which are specified in the configuration of the Cash Management Grouping entered in the Structure field in Figure 10.)

Figure 10

Capture credit exposure of cash balances

The Link to Cash Management program can be executed by using transaction code RMCM or following menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Tools > End-of-Day Processing > Generate Utilizations. This path takes you to the screen shown in Figure 10.

Populate the following fields in Figure 10:

• In the Structure field, enter the Cash Management Grouping  to capture the credit exposure from cash balances at external banks. The Cash Management Grouping is created in configuration and references the G/L account balances to be included as risk objects.
• Enter the current date in the Date fields

Select the Including accumulated balance indicator so that cash postings with prior value dates are accumulated and included in the balance amounts. Select the Create Transactions Directly radio button to create financial objects for the cash balances. Click the execute icon to create the financial objects for the cash balances.

In the next screen, you see output similar to that displayed in Figure 11, which shows the financial object numbers that have been created. These financial object numbers represent the credit risk associated with the external bank account balances. These financial objects are included in the limit utilizations displayed in the Limit Utilization report (transaction code TBL4).

Figure 11

Financial objects for bank account risks

End-of-Day Processing

Running the End-of-Day Processing program recalculates the utilization of limits with Status of Limit Utilization 2. (The limits with Status of Limit 1 are updated at trade entry.) To generate utilizations at the end of day, execute transaction code KLNACHT or follow menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Tools > End-of-Day Processing > Generate Utilizations. This path takes you to the screen shown in Figure 12.

Figure 12

Generate utilizations at the end of day

The following fields in Figure 12 need to be populated:

• Enter the current date in the Valuation Date field.
• In the Determination Procedure field, enter 31 (counterparty risk market value).
• Leave the Company Code fields blank to generate utilizations across all company codes.
• In the Log Level field, select 2 to see messages in the case of errors.

Click the execute icon to generate the end-of-day utilizations.

After the Generate Utilizations program is run, the following message is displayed: End-of-day processing was completed successfully. No additional information is given by this report.

To check for any error messages, run Execute Postprocessing transaction code KLNACHT2 or follow menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Tools > End-of-Day Processing > Execute Postprocessing (not shown here).

End-of-Day Utilization Report

The credit limit utilization report, which shows the current credit exposure to counterparty banks, is available from the SAP system to the front office traders to help them decide the counterparties to take positions against during the day. Limits are checked both at trade entry and at the end of day, and both are visible through this utilization report. (Limits with Status of Limit Utilization 2 are created during trade entry. Limits with Status of Limit Utilization 1 are created during the end-of-day calculation.)

To access the Overview of Utilizations report, execute transaction code TBL4 (Direct Characteristics) or TBLB (All Characteristics) and follow menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Information System > Reporting > Utilizations > Overview Utilizations. This path takes you to the screen shown in Figure 13.

Figure 13

The Overview of Utilizations report

In the General Access Options section of Figure 13, enter a value in the Limit Types field. In the Selection of Utilizations section, enter a number in the Status of Limit Utilization field for the status to be checked (e.g., 1). After you click the execute icon, the limit utilizations are displayed as shown in Figure 14.

Figure 14

Limit utilizations in the Overview of Utilizations report

The end-of-day utilization report shows, by counterparty bank, the following information: the limit amount, the current exposure to the counterparty (which is the credit exposure to the counterparty banks), the available limit amount, and the percentage of the limit that is utilized, as shown in Figure 14. The attributable amounts are accumulated to determine the utilization amounts. Notice in Figure 14 that the limits utilization for investments with TR_BANK1 is in yellow, indicating the utilization is in the critical utilization range, which is 90 to 100 percent of the limit. (The Critical Limit Utilization was entered as 90 in Figure 4.)

You can drill into a utilization to see the detail that makes up the utilization, including drilling into the actual trades (to see all the details of the trades). To do this, click the indicator on the left side of the utilization line, as shown in Figure 14, and then click the Individual utilizations button. The system then shows the trades and bank balances that make up the utilizations as shown in Figure 15.

Figure 15

Trades and bank balances in the Overview of Utilizations report

In Figure 15, you can place your cursor on a line and click the Master Data button to drill down to the trade creating the credit exposure, as shown in Figure 16.

Figure 16

Drill into the trade from the limit utilization report

Single Transaction Check

After the Credit Risk Analyzer is activated (see the configuration steps in the “Enter Global Settings” section), the Default Risk Limit tab displays in the trade, as shown in Figure 17. This tab holds the credit exposure characteristics that are used in the determination of credit risk. The primary characteristics should be automatically filled by derivation rules in configuration.

Figure 17

The Default Risk Limit tab with credit exposure characteristics

The online limit check from the trade is done both when you click the check icon  at the top of the screen in Figure 17 while entering a deal, or immediately after you click the save icon (not shown). This information gives the trader immediate feedback about whether the trade being entered exceeds any limits. Figure 18 shows the message the trader receives if no limits have been exceeded.

Figure 18

Message when no limits have been exceeded

If the limit is close to being fully utilized, the warning message in Figure 19 is displayed, letting the user know that the limit is close to being fully utilized.

Figure 19

The critical limit utilization message

When you click the Limit Utilization Details button, shown in Figure 17, you see how the trade being entered contributes to the credit exposure limits set up. This information is shown in Figure 20.

Figure 20

Limit Utilization Details for trade in critical range

If a trade is entered into the system that will cause a limit to be exceeded, a warning message is issued that the limit has been exceeded, as shown in Figure 21.

Figure 21

Message when limit has been exceeded

Once the trade is saved, the limit utilization is updated in real time, reflecting the exposure of the trade just saved.

How to Configure Credit Risk Analyzer

The Credit Risk Analyzer functionality builds on SAP’s Transaction Manager module and the Cash Management module, so in this article, I assume that these modules have been configured.

Each section is one configuration node. I cover the configuration in the order it must be entered into the SAP system (taking into consideration dependencies in the configuration settings):

1. Basic Settings (define determination procedure, default risk rule, and the derivation of the default risk rule)
2. Attributable Amount Determination (define how the amount of risk exposure is to be calculated)
3. Limit Management (define the limit types to be used)

Enter Global Settings

The first configuration step is to make the initial settings for Credit Risk Analyzer. To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Global Settings. In the initial screen that appears, click the New Entries button and enter the settings based on the scenarios being implemented, as shown in Figure 22.

Figure 22

Set the global settings

The fields relevant to this configuration step in Figure 22 based on the use case scenario are the following:

• Select the Default Risk Active check box to activate Credit Risk Analyzer.
• Enter an Evaluation Type if any trade valuations are relevant to the Credit Risk Analyzer processing. This is used if the market value of certain trades were used to determine the amount of credit risk relevant for the trade.
• Select the Deriv. Active indicator if default risk rules will be used and should be derived by configuration, which is relevant for my use case.
• Select the Sec.Acct Pos. indicator if issuer risk should be tracked on securities account positions defined in the SAP system. Security positions are not relevant for my use case.
• Select the CM link is active indicator if bank account balances should be incorporated into Credit Risk Analyzer, which is the case for my use case scenario.
• Set the Workflow is active indicator if a workflow message will be triggered if a limit has been exceeded.

After you finish making the settings, click the save icon to save the changes.

Activate Financial Object Integration

In this step, you indicate how errors encountered when integrating trades into Credit Risk Analyzer should be handled. You also specify the trade types that should be included in Credit Risk Analyzer, which is done by specifying the company code and product types to be included.

To complete this step, execute the configuration node Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Automatic Integration of Financial Objects in Transaction Master Data > OTC Derivatives > Activate / Deactivate Financial Object Integration. This action opens the screen shown in Figure 23.

Figure 23

Activate financial object integration

In the first part of this configuration, you specify what to do in the case of errors. Do you want to allow the trade to save even if the trade cannot be fully integrated into Credit Risk Analyzer? If this is the case, select the radio button under the Part.act. (partially active) column (Figure 23). If saving the trade should not be possible if there are errors integrating with Credit Risk Analyzer, select the radio button under the Fully active column. The recommended setting is partially active. The field under the Component column should be set to LMFO (Limit Management Financial Object) Analysis.

Click the New Entries button, and for each company code to be included, enter the settings based on the scenarios being implemented, as shown in Figure 23. Now select the box to the left of a row as shown in Figure 24 and then double-click the Product Types folder.

Figure 24

Double-click the Product Types folder

The screen in Figure 25 is then displayed.

Figure 25

Specify product types to be included in Credit Risk Analyzer

Specify all product types that should integrate into Credit Risk Analyzer as shown in Figure 25. This step should be repeated for each company code entered in Figure 24.

When you finish making the settings, click the save icon to save the changes.

Activate Integrated Default Risk Limit Check

The purpose of this step is to activate an online limit check. The online limit check is done while entering a deal and the check icon is clicked, or immediately after the save icon is clicked. This gives the trader immediate feedback about whether the trade being entered exceeds any limits (see Figures 18, 19, and 21.) After the trade is saved, the limit utilization is updated in real time, reflecting the exposure of the trade just saved.

To access this configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Activate Integrated Default Risk Limit Check. The path displays the screen shown in Figure 26.

Figure 26

Activate the trade integrated limit check

Click the New Entries button and enter the data shown in Figure 26 for each company code and Transaction Manager sub-module. The Application field indicates the Transaction Manager sub-module as shown in Figure 27.

Figure 27

Application options for integrated limit check

When you finish making the updates, click the save icon to save the changes.

Define a Default Risk Rule

The default risk rule defines the criteria used to determine the date for market value change period (term) and the risk commitment period of a transaction. You can choose from end of term of the transaction or interest commitment period of the transaction. I use the end date of the trade. The recovery rate determination, if used, is also stored in the default risk rule. (The recovery rate is not being used in my use case scenario.)

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Definitions > Define Default Risk Rule. In the screen that appears, click the New Entries button and enter the data shown in Figure 28.

Figure 28

Definition of a default risk rule

The default risk rule specifies whether, in addition to credit risks, settlement risks should also be calculated for the trades assigned to this rule. When settlement risks are to be calculated, select the Settlement Risk check box, which is visible in Figure 28.

The fields relevant to this configuration step in Figure 28 based on my use case scenario are the following:

• Enter end of term in the Calc Base MVCP field
• Enter end of term in the Calc Base RCP field
• Do not select the Settlement Risk indicator as only credit risk is relevant to my use case scenario.

When you finish making the settings, click the save icon to save the changes.

One default risk rule is assigned to a trade or financial object. Default risk rules are assigned to the determination procedures in the later configuration steps. In customizing of Derivation Strategies, you define how the default risk rule is determined. It can be derived from the product types or derived individually.

Define Valuation Factor Determination

Next, the Valuation Factor Determinations are defined. The Valuation Factor Determination specifies the type of risk to be captured. The possible choices are Counterparty/issuer risk or Country risk (only for the Banking solution).

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Definitions > Define Valuation Factor Determination. This path displays the screen shown in Figure 29.  Click the New Entries button and enter the data shown in Figure 29.

Figure 29

Valuation Factor Determination set to Counterparty Risk

The fields relevant to this configuration step in Figure 29 based on my use case scenario are the following:

• The Valuation Factor is a key field and so must be a unique number.
• Enter Counterparty Risk in the Short Text field.
• Enter Valuation Procedure for Counterparty/issuer risk in the long text field.
• The other fields are hard-coded.

When you finish making the settings, click the save icon to save the changes.

Define Variable Assignment ID

Next, you define the variable assignment IDs. The variable assignment IDs are the key figures used in the calculation of the attributable amounts. SAP allows for the following for variable assignment IDs:

• Market Value/ NPV
• Nominal Amount
• Return Payment Amount
• Advance Payment Amount
• Imported Key Figure Amount (custom solution)

In this step, you define the key figures used in the calculation of the attributable amounts for counterparty risks. For my use case scenario, the two Variable Assignment IDs used are Nominal and NPV (market value).

As mentioned above, SAP uses the term attributable amount to be the amount of the default risk that arises when a trade is executed (saved in the SAP system). Attributable amounts are derived on the basis of certain base key figures of the single transaction (nominal amount or NPV for my use case scenario).

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Attributable Amount Determination > Define Variable Assignment ID.

In the screen that appears, click the New Entries button and enter the data shown in Figures 30.

Figure 30

Variable assignment ID for market value (NPV)

The fields relevant to this configuration step in Figure 30 based on my use case scenario are the following:

• Enter a unique number in the Var. Assig. ID (variable assignment ID) field
• Enter Market Value in the Var. Assignt (variable assignment) field
• Select the variable for Net Present Value in the Variable 1 field.

When you finish making the settings, click the save icon to save the changes.

Define Determination Procedure

Next, define the determination procedures. Determination procedures enable you to define flexibly which risk category is to be used for calculating the limit utilization: credit risk or settlement risk. If it is for one trade, and both credit risk and settlement risk should be tracked, at least two determination procedures are required to measure these risks. (One determination procedure is required for each risk category.)

This step defines how to calculate the attributable amounts (amount of credit exposure) for the financial positions. (Keep in mind that the attributable amounts are accumulated to determine the utilization amounts in the Credit Risk Analyzer reports.) Examples are:

• NPV
• Nominal amounts
• Mixed exposures (such as mixture of NPVs or nominal values)
• Incorporating default risk probabilities
• Incorporating add-on factors
• Incorporating issuer risks

The calculation of the attributable amount can be straightforward, such as using the nominal value or market value of a trade, or complex, such as incorporating the credit rating of the business partner, a mark-up percentage, or a recovery percentage if a business partner defaults the expected amount to be recovered.

With the variable assignment ID configuration, you set how attributable amounts for counterparty risks are to be calculated. Based on my use case scenario, one Valuation Factor Determinations needs to be created for market value (NPV) for derivative trades.

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Definitions > Define Determination Procedures. This path displays the screen shown in Figure 31.

Figure 31

Attributable amount set to market value (NPV) of trade

The fields relevant to this configuration step in Figure 31 based on my use case scenario are the following:

• Enter a unique number for the Determin. Procedure
• Enter short text of CP Risk / Market Val
• Enter long text of Counterparty/Issuer risk: Market Value
• Enter the Valuation Factor defined in the “Define Valuation Factor Determination” section.
• Enter the risk category of 1 for credit risk.
• Select Gross for the exposure type because collateral should not be taken into consideration for my use case scenario
• Select 0001 for the Collateral Valuation Rule, which is not used for my use case scenario, but this is a required field.

When you finish making the settings, click the save icon to save the changes.

Edit Settings for Determination Procedures

The definition for determination procedures and default risk rules are important customizing settings to ensure the Credit Risk Analyzer works correctly. They are combined to create formulas for the attributable amount calculation of financial instruments.

An SAP system uses formulas to determine the attributable amounts. For each combination of determination procedure and default risk rule, you specify the formula to be used to calculate the attributable amount (amount of risk exposure).

For example,

• The attributable amount is the max(0, calculation basis)
• The attributable amount is the max(0, calculation basis) * default probability (probability of default)

In my use case scenario, there is one determination procedure needed, which is for the market value (NPV) of trades, shown in Figure 32. Each of the determination procedures need to be assigned to the default risk rule. The formula for market value (NPV) to use is max(0, NPV amount).

Figure 32

Define determination amount for market value (NPV)

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Attributable Amount Determination > Edit Settings for Determination Procedures. This path displays the screen shown in Figure 32. Click the New Entries button.

The fields relevant to this configuration step in Figure 32 based on my use case scenario are the following:

• Enter the determination procedure defined in the “Define Determination Procedure” configuration step.
• Enter the Default Risk Rule defined in the “Define a Default Risk Rule” configuration step.
• Select the Formula ID 1 for Max(0, CALCBASE).
• Select 1 for the Calculation Base to use just the market value (NPV) of the trade
• Select the Var. Assig. ID for market value defined in the “Define Variable Assignment ID” configuration step.

When you finish making the settings, click the save icon to save the changes.

Define the Single Transaction Check Product

Single transaction check (STC) refers to the online limit check from a trade. An STC is done both while entering a deal and the check icon is clicked, or immediately after the save icon is clicked. This functionality gives the trader immediate feedback about whether the trade being entered exceeds any limits.

To have the integrated limit checking while entering a trade, you need to complete the following steps:

1. You must have configured the automatic financial object integration. (This was described in the “Activate Financial Object Integration” section.)
2. Integrated default risk limit check must be active. (This was described in the “Activate Integrated Default Risk Limit Check” section.)
3. You need to have defined at least one single-transaction-check product for the single-transaction-check transaction. (This is described here.)

The External Financial Transaction Category defines the type of trades to which the STC product applies. There must be one STC product defined as the default for each External Financial Transaction Category. For example, the External Financial Transaction Category for derivative trades is 06. There must be only one STC product defined that has an External Financial Transaction Category 06 with the Default indicator selected.

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Definitions > Define Single Transaction Check Product. Click the New Entries button and enter the inputs shown in Figures 33 to 35.

Figure 33

Single transaction check for derivative trades

Figure 34

Single transaction check for investment trades

Figure 35

Single transaction check for bank account balances

Based on the use case scenario, three STC products should be defined; one for derivative trades, one for investments, and one for cash balances, which correspond to Figures 33 to 35. The following fields are relevant to this configuration step:

• Enter an alphanumeric key for each STC Product.
• Enter a short and long text for the STC Product.
• Select the External Financial Transaction Category for the STC Product. The External Financial Transaction Category for money market (investment) trades is 05. The External Financial Transaction Category for cash balances is 10. The External Financial Transaction Category for derivative trades is 06.
• Select the Default indicator. There can be only one STC Product with the default indicator selected for each External Financial Transaction Category. If the Default indicator is selected, the Default Risk Rule and Limit Product Group fields cannot be populated.

Click the save icon to save your entries.

Define Limit Product Groups

Limit product groups can be used to combine specific trades or transactions into subgroups. Using limit product groups as a limit characteristic, you are able to assign limit amounts to the limit product group, which is what you have done for this use case scenario. In the use case scenario, you specified that the amount of investment trades with a group business partner or bank should not exceed $15 million, that the amount of derivative trades with a group business partner or bank should not exceed $25 million, and that the amount of cash balances with a group business partner or bank should not exceed $5 million. The total of the subgroups ($40 million) is the maximum amount that should be exposed to a group bank.

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Limit Management > Define Limit Product Groups.

Click the New Entries button (not shown). This action displays the screen in Figure 36.

Figure 36

Define limit product groups

Click the display and change icon  shown in Figure 36. In the next screen the fields relevant to this configuration step are the following as shown in Figure 37:

• Enter a three character key for each limit product group
• Enter a textual description for each limit product group

Figure 37

Enter a character key and a textual description for the limit product groups

Click the save icon to save your data. After you have defined the limit product groups, you can use the limit product groups as a characteristic to the limits that are to be maintained. I explain how to do this step in the next section.

Define Limit Types

The definition of limit types pulls together most of the Credit Risk Analyzer configuration to meet the business requirements. This is key configuration for the Credit Risk Analyzer. The limit types determine which determination procedures are used and which transactions are taken into account in calculating limit utilizations.

For example, the limit type configuration drives that the transactions are tracked at a global business partner level, by country, or by portfolio. Limits are defined by one or more characteristics. Credit Risk Analyzer provides you seven direct characteristics for the default risk limit: company code, business partner, limit product group, portfolio, trader, currency, and monitoring unit. In addition, the country, industry, and credit rating are indirect characteristics that can be derived from the business partner master record. There can be up to 15 additional characteristics individually using a custom exit. The limit type characteristics for my use case scenario are business partner and limit product group.

To access the configuration node, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Limit Management > Define Limit Types. To enter the configuration, click the New Entries button (not shown) and in the screen that appears (Figure 38), enter the limit type settings described below.

Figure 38

Enter limit type settings to define the group counterparty limit type

The following fields are relevant to this configuration step as shown in Figure 38:

• The Determin. Procedure defines the type of risk to be calculated by the limit type. The types of risk in the use case scenario are nominal value and NPV. Enter the determination procedure created in the “Define Determination Procedure” configuration step.

• Using the Transactions field you specify whether only asset or only liability trades are included in the utilization determination, or whether asset and liability trades are to be totaled or accumulated. Set the Transactions field to Netting of asset-side and liability-side transactions because my use case scenario specified that you use trades on a net basis. (This means the incoming and outgoing flows for a trade should be netted to determine the attributable amount for the trade.)

• The Update Category sets when utilizations are generated. The choices are 1 – Only update when utilizations are generated and 2 – Update when utilizations are generated and online. Select (2) so that utilizations are updated both when trades are entered and when the end-of-day processing program (transaction code KLNACHT) is run.

• The Limit Currency field is used to determine the cur­rency in which limits are kept. Enter the currency limits that should be displayed in this field. For my use case scenario, enter USD. If the currency field is not populated, the SAP system uses the company currency.

• The Automatic Gen. (generate limits automatically) field controls if limits are generated automatically if they have not yet been created. If the indicator automatically generate limits is not set, making a trade does not result in any update of utilizations if a limit has not already been created. Set the field to Generate limit with check because you only know if a limit has been exceeded if there is a limit of at least 0.

• With the Early warning cntrl field, you can specify whether a warning should be given when a percentage barrier or the external limit is reached. For example, you can specify that once 90 percent of the limit is utilized, a warning message is triggered as new trades are entered into the SAP system. Set the Early warning cntrl field to Percentage Barrier to activate the warning at a percentage level (e.g. activate the warning when the limit is 90 percent or more utilized).

• The Release section controls if a release step is required when new limits are added or existing limits are changed. Check the Release Active check box and set the Initial release status to Limit flagged for release to require releasing of limits.

• In the Business partner relationships section, you specify if the business partner relationship settings should be incorporated into the limit tracking. For example, with this configuration, you specify that the subsidiary or branch-level business partners roll up to the group or parent-level business partners. In most situations you would want this. Most companies track their risk exposure to the parent company. For example, bank business partners are typically created at the branch level (e.g., Bank1 Mumbai and Bank1 Frankfurt), and roll up to a group business partner (e.g., Bank1 Group).

After you populate these fields, press the Enter key on the keyboard and then click the save icon to save the changes. Next, double-click the Assign Limit Characteristics folder as shown in Figure 39.

Figure 39

Assign characteristics to the limit type

This action opens the screen shown in Figure 40.

Figure 40

Assign limit characteristics to GRP limit type

The use case scenario calls for the business partner (counterparty bank) and the limit product group to be the characteristics of the GRP limit type being created. Click the New Entries button and enter the limit characteristics that define the level of the limit being created, as shown in Figure 40.

When you finish making the settings, click the save icon to save the changes.

In the next configuration step, you assign the limit product group INV (Investment trades) to all the investment trades. This is done by setting up a derivation strategy, which is covered in the next section.

In this configuration node, the derivation strategies used to derive the characteristic values defined for each trade or financial object are defined for Credit Risk Analyzer. The derivation strategies may be derivation rules, table lookups, moves, clears, or enhancements. The derivation strategies populate the characteristics in Credit Risk Analyzer structures for each trade or financial object on the Default Risk Limit tab of trades. Any characteristic values used in the limit types should be automatically populated using the derivation rules.

In this configuration step, the following derivation rules are created for derivative trades:

• Activate the Counterparty/Issuer Risk Active indicator
• Assign the DER limit product group
• Populate the business partner field
• Assign the Default Risk Rule DEFAULT, which was created in the Define a Default Risk Rule configuration step.

To complete this step, follow IMG menu path Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Basic Settings > Automatic Integration of Financial Objects in Transaction Master Data > OTC Derivatives > Derive Default Risk Control Parameters for Derivatives. This path takes you to the screen shown in Figure 41.

Figure 41

The initial screen to create derivation rules

Click the display and change icon to toggle into change mode. The screen then looks like the one in Figure 42.

Figure 42

Change mode for derivation rules configuration

Click the create icon to enter the first derivation rule. A pop-up screen appears (Figure 43).

Figure 43

Derivation strategies

Select Move from the list and click the enter icon. You select the Move radio button because you want to always set the Counterparty/Issuer Risk Active indicator to 1 (yes). Enter the Step Description, make the Constant equal to 1 (yes), and make the Target field include Indicator: Counterparty/Issuer Risk Active (Figure 44). This derivation rule sets the default risk indicator to yes (set) for all derivative trades. Click the back icon  to return to the initial screen to create derivation rules.

Figure 44

Activate default risk derivation strategy

Next, you create a derivation rule to set the Limit Product Group. The derivation rule sets the Limit Product Group DER for all derivative product types. Click the create icon (refer back to initial screen in Figure 42) to create the next derivation rule. In the pop-up shown in Figure 43, select Derivation Rule and click the enter icon. You see the screen shown in Figure 45.

Figure 45

The initial screen for the derivation rule

Enter a Step Description such as Assign Limit Product Group. The source field should be set as product type from the F4 pop-up screen, and the target field should be set from the F4 pop-up screen as Limit Product Group, as shown in Figure 46. The limit product group is set based on the product type of the derivative trades.

Figure 46

Derivation strategy for limit product group

There is no condition relevant to this derivation rule, as the derivation rule applies to all derivative trades. A condition would be added if the rule applied only to a subset of the derivative trades. Next, to enter the derivative product types, click the Maintain Rule Values button shown in Figure 46. This action displays the screen in which you enter the derivative product types as shown in Figure 47. Click the back icon to return to the initial screen to create derivation rules (Figure 41).

Figure 47

Assign limit product group by product type

Next, create a derivation rule to set the Business Partner field. Click the create icon to create the next derivation rule from Figure 41. In the pop-up screen shown in Figure 43, select Move and click the enter icon. You see the screen similar to that shown in Figure 48. Enter a step description such as Move Business Partner, select Business Partner Number (KONTRH) from the F4 pop-up option for the Source field, and then in the target field, select Business Partner Number (PARTNR) from the F4 pop-up option. Click the back icon (not shown) to return to the initial screen to create derivation rules (Figure 41).

Figure 48

Move derivation strategy for business partner

The last derivation rule is to assign the default risk rule. Click the create icon to create the next derivation rule from Figure 41. In the pop-up shown screen in Figure 43, select Move and click the enter icon. You see a blank screen similar to the one in Figure 49. Enter a description such as Default Risk Rule, select the Constant radio button, and select DEFAULT from the pop-up list of options for that field. In the target field select the Default Risk Rule (ARR) field from the available choices. The screen should now look like the one in Figure 49.

Figure 49

Move derivation strategy for Default Risk Rule

When you are done making the settings, click the save icon to save the changes. Then click the back icon to return to the first input screen of this configuration node.

Note
To capture your derivation strategy configuration, you must select each derivation strategy and click the transport icon . The derivation strategy configuration is saved to a workbench transport.

After the Credit Risk Analyzer configuration is completed, an additional tab appears in the trades. This tab, named the Default Risk Limit, integrates the trade into Credit Risk Analyzer. Figures 50 and 51 show this tab in the trade.

Figure 50

An example of a derivative trade

Figure 51 shows the Default Risk Limit tab in the trade that holds the Credit Risk Analyzer characteristics and settings.

Figure 51

The Default Risk Limit tab holds Credit Risk Analyzer characteristics and settings

The derivation strategies in configuration automatically populate the limit characteristic fields in the Default Risk Limit tab.

Define the Cash Management Grouping Header

To reflect the credit risk of bank account balances in Credit Risk Analyzer, a Cash Management grouping is needed to capture the credit exposure from the cash G/L balances. In this step, the header for a Cash Management grouping is defined.

To complete this step, follow IMG menu path Financial Supply Chain Management > Cash and Liquidity Management > Cash Management > Structuring > Groupings > Define Groupings and Maintain Headers. In the initial screen (not shown), click the New Entries button, and the screen in Figure 52 is displayed.

Figure 52

Define cash management grouping header blank screen

Enter a key name in the field in the Grouping column and long and short descriptions in the Heading and Line heading fields for the cash management grouping being created as shown in Figure 53.

Figure 53

Define cash management grouping header

When you finish entering these configuration settings, click the save icon to save the changes.

Define a Cash Management Grouping Structure

In this step, the structure for a Cash Management grouping is defined. The grouping to be defined should include only the cash G/L balances to be included in Credit Risk Analyzer. This could include the main cash account and the cash clearing accounts, depending on the business requirements.

To complete this step, follow the IMG menu path Financial Supply Chain Management > Cash and Liquidity Management > Cash Management > Structuring > Groupings > Maintain Structure. This path takes you to a screen similar to the one shown in Figure 54.

Figure 54

Define a cash management grouping structure

Click the New Entries button (not shown) and enter the fields for the Cash Management structure, as shown in Figure 54.

• In the fields under the Grouping column, enter the Cash Management Grouping defined in the Define Cash Management Grouping header.
• Enter the line type. Enter E for planning level line and G for G/L account. There only needs to be one line for a planning level, similar to the screen in Figure 54.
• In the Selection field, enter the G/L account.
• In the CoCd (company code) field, enter the company code for the cash G/L account. If the field is left blank, it is a wildcard.
• In the ChAc (chart of accounts) field, enter the chart of accounts. If the field is left blank, it is a wildcard.
• In the Sum.term (summarization term) field, enter a freeform text to describe the line.

When you finish entering these configuration settings, click the save icon to save the changes.

Once a day, the Link to Cash Management program (transaction code RMCM) should be run using this Cash Management Grouping to capture the risk exposure of the cash balances at external banks. The cash management exposure then shows up in the Utilization report.

Mapping the Business Partner to Cash Accounts

In this final step, the cash G/L accounts are mapped to business partners. This is done so that when the Link to Cash Management program (transaction code RMCM) is run, the system knows under which business partner to reflect the credit risk for the bank account. The bank account G/L accounts entered in KLMAP should be the same bank accounts included in the Cash Management Grouping created above.

Creating limits is done using transaction code KLMAP or by following menu path Accounting > Financial Supply Chain Management > Treasury and Risk Management > Credit Risk Analyzer > Tools > Link to Cash Management > Assign Node to Business Partner. This path takes you to the screen shown in Figure 55 in which you enter the company code, G/L account, planning level, and currency of the cash accounts that should be reflected in Credit Risk Analyzer. In addition, you map each cash account to a business partner and default risk rule. By doing this step you link the risk of the cash balances at the external banks to specific group banks in Credit Risk Analyzer.

Figure 55

Assign the business partner to cash G/L accounts

Mary Loughran

Mary Loughran has been specializing in the SAP Financials area since 1997 and has worked with numerous clients throughout North America and Europe in the areas of finance and treasury. She was employed as a consultant with SAP America and was a designated expert within SAP America for treasury before she left SAP in 2004. Mary’s expertise is in the areas of SAP Treasury and Risk Management, SAP In-House Cash, Liquidity Planner, Accounts Payable, payments from SAP in general, Cash Management, and Electronic Banking. Mary was an independent consultant from 2004 to 2016. 

You may contact the author at loughran@gmail.com.

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