AIG 2012 Annual Report Download - page 188

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Other Operations
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Global Capital Markets
GCM actively manages its exposures to limit potential economic losses, and in doing so, GCM must continually
manage a variety of exposures including credit, market, liquidity, operational and legal risks. The senior management
of AIG defines the policies and establishes general operating parameters for GCM’s operations. Our senior
management has established various oversight committees to regularly monitor various financial market, operational
and credit risks related to GCM’s operations. The senior management of GCM reports the results of its operations to
and reviews future strategies with AIG’s senior management.
GCM Derivative Transactions
A counterparty may default on any obligation to us, including a derivative contract. Credit risk is a consequence of
extending credit and/or carrying trading and investment positions. Credit risk exists for a derivative contract when that
contract has a positive fair value to AIG. The maximum potential exposure will increase or decrease during the life of
the derivative commitments as a function of maturity and market conditions. To help manage this risk, GCM’s credit
department operates within the guidelines set by the credit function within ERM. Transactions that fall outside these
pre-established guidelines require the specific approval of the ERM. It is also AIG’s policy to record credit valuation
adjustments for potential counterparty default when necessary.
In addition, GCM utilizes various credit enhancements, including letters of credit, guarantees, collateral, credit
triggers, credit derivatives, margin agreements and subordination to reduce the credit risk relating to its outstanding
financial derivative transactions. GCM requires credit enhancements in connection with specific transactions based
on, among other things, the creditworthiness of the counterparties, and the transaction’s size and maturity.
Furthermore, GCM generally seeks to enter into agreements that have the benefit of set-off and close-out netting
provisions. These provisions provide that, in the case of an early termination of a transaction, GCM can set off its
receivables from a counterparty against its payables to the same counterparty arising out of all covered transactions.
As a result, where a legally enforceable netting agreement exists, the fair value of the transaction with the
counterparty represents the net sum of estimated fair values.
The fair value of GCM’s interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward
commitments, futures, and forward contracts reported in Derivative assets, at fair value, was approximately
$3.2 billion at December 31, 2012 and $3.9 billion at December 31, 2011. Where applicable, these amounts have
been determined in accordance with the respective master netting agreements.
GCM evaluates the counterparty credit quality by reference to ratings from rating agencies or, where such ratings are
not available, by internal analysis consistent with the risk rating policies of the ERM. In addition, GCM’s credit
approval process involves pre-set counterparty and country credit exposure limits subject to approval by the ERM
and, for particularly credit-intensive transactions, requires approval from the ERM.
The following table presents the fair value of GCM’s derivatives portfolios by counterparty credit rating:
Rating:
AAA $ 260
AA 58
A 1,218
BBB 2,081
Below investment grade 247
Total $ 3,864
See Critical Accounting Estimates below and Note 12 to the Consolidated Financial Statements for additional
discussion related to derivative transactions.
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AIG 2012 Form 10-K 171
At December 31,
(in millions) 2012 2011
$ 145
168
745
1,907
199
$ 3,164
ITEM 7 / ENTERPRISE RISK MANAGEMENT