Goldman Sachs 2002 Annual Report Download - page 54

Managem ent’s D iscussion and A nalysis
52 G O L D M A N SA CH S 2002 AN N UA L R EPO RT
OVER-THE-COUNTER DERIVATIVE CREDIT EXPOSURE
($ IN MILLIONS)
EXPOSURE PERCENTAGE OF
COLLATERAL NET OF EXPOSURE NET
CREDIT RATING EQUIVALENT EXPOSURE HELD(2) COLLATERAL OF COLLATERAL
AAA/Aaa $ 3,747 $ 170 $ 3,577 13%
AA/Aa2 7,271 1,147 6,124 21
A/A2 12,831 996 11,835 41
BBB/Baa2 6,036 733 5,303 18
BB/Ba2 or lower 2,666 747 1,919 7
Unrated(1) 743 609 134 —
Total $33,294 $4,402 $28,892 100%
The following tables set forth our OTC derivative credit exposure, net of collateral, by remaining contractual maturity:
EXPOSURE NET OF COLLATERAL
(IN MILLIONS)
0–6 6–12 1–5 5–10 10 YEARS
CREDIT RATING EQUIVALENT MONTHS MONTHS YEARS YEARS OR GREATER TOTAL(3)
AAA/Aaa $ 233 $ 112 $1,033 $ 884 $1,315 $ 3,577
AA/Aa2 1,424 508 1,472 1,408 1,312 6,124
A/A2 1,721 734 2,288 1,444 5,648 11,835
BBB/Baa2 1,241 672 2,252 727 411 5,303
BB/Ba2 or lower 693 185 711 274 56 1,919
Unrated(1) 111 14 7 1 1 134
Total $5,423 $2,225 $7,763 $4,738 $8,743 $28,892
0–6 6–12 1–5 5–10 10 YEARS
PRODUCT MONTHS MONTHS YEARS YEARS OR GREATER TOTAL(3)
Interest rate contracts $ 779 $ 452 $5,237 $4,039 $8,563 $19,070
Currency contracts 2,513 742 868 458 170 4,751
Commodity contracts 1,159 619 1,094 178 9 3,059
Equity contracts 972 412 564 63 1 2,012
Total $5,423 $2,225 $7,763 $4,738 $8,743 $28,892
(1) In lieu of making an individual assessment of the credit of unrated counterparties, we make a determination that the collateral held in respect of
such obligations is sufficient to cover a substantial portion of our exposure. In making this determination, we take into account various factors,
including legal uncertainties and market volatility.
(2) Collateral is usually received under agreements entitling Goldman Sachs to require additional collateral upon specified increases in exposure or
the occurrence of adverse credit events.
(3) Where we have obtained collateral from a counterparty under a master trading agreement that covers multiple products and transactions, we have
allocated the collateral ratably based on exposure before giving effect to such collateral.
Derivatives transactions may also involve the legal
risk that they are not authorized or appropriate for
a counterparty, that documentation has not been
properly executed or that executed agreements may
not be enforceable against the counterparty. We
attempt to minimize these risks by obtaining advice
of counsel on the enforceability of agreements as
well as on the authority of a counterparty to effect
the derivative transaction.
Operational Risks
Operational risk is the risk of reputational damage, regu-
latory intervention or financial loss resulting from inade-
quate or failed internal processes or systems. Operational
failures can occur in mechanical or technological systems
or infrastructure, and they can take place during the ordi-
nary course of business or as the result of extraordinary
events, including events external to Goldman Sachs. They
also may be caused by human error or by malfeasance.
The following table sets forth the distribution, by credit rating, of substantially all of our exposure with respect to
OTC derivatives as of November 2002, after taking into consideration the effect of netting agreements. The categories
shown reflect our internally determined public rating agency equivalents.