Determining Activity Risk

Activity Risk identifies the risk of the Activity as seen from the viewpoint of each Party on a transaction. In general, the Activity Risk is the highest risk of the other parties on the transaction or of the transaction Channel or Product itself. As with calculating Party Entity Risk, the derivation of Party Activity Risk varies by transaction type.

Determining Activity Risk on Front Office Transactions

Front Office Transaction Party Activity Risk calculates risk separately from the point of view of each party on the transaction. The risk is intended to identify how risky the activity is independent of risk factors already associated to the Party through the Party Entity Risk. As such, on Front Office Transactions, the risk is calculated using the Party Entity Risk of the parties on the other side of the transaction. The general approach is to use the highest of the Channel Risk, Product Risk, and Party Entity Risk of the other parties. Channel and Product Risk are provided in the DIS file for Front Office Transactions.

Several party roles effect activity risk. The following sections describe the relationship between varying party roles and activity risk for transactions.

Table -26 Electronic Funds Transfer Transaction

Party Role Roles Impacting Activity Risk
Originator, Secondary Originator, Sending Bank Intermediary Banks, Receiving Bank, Beneficiary, Secondary Beneficiary
Intermediary Banks All roles except for the party for which the Activity Risk is being calculated
Receiving Bank, Beneficiary, Secondary Beneficiary Intermediary Banks, Sending Bank, Originator, Secondary Originator
Cash Transaction

Table -27 Cash Transaction

Party Role Roles Impacting Activity Risk
Originator Location, Conductor
Location Conductor, Originator, or Beneficiary
Conductor Location, Originator, or Beneficiary
Beneficiary Location, Conductor

Note:

A Cash Transaction record can have an Originator or a Beneficiary, but not both.

Monetary Instrument and Check Transactions

Table -28 Monetary Instrument and Check Transactions

Party Role Roles Impacting Activity Risk
Remitter, Issuing Institution Depositing Institution, Clearing Institution, Beneficiary, Secondary Beneficiary, Conductor
Clearing Institution Remitter, Issuing Institution, Depositing Institution, Beneficiary, Secondary Beneficiary, Conductor
Depositing Institution, Beneficiary, Secondary Beneficiary Remitter, Issuing Institution Clearing Institution, Conductor
Conductor Remitter, Issuing Institution, Clearing Institution, Depositing Institution, Beneficiary, Secondary Beneficiary

Determining Activity Risk on Back Office Transactions

Activity Risk on Back Office Transactions is only calculated for the Account that is the focus of the activity. Since the only other risk factors available are the Offset Account’s Effective Risk and the Channel and Product Risks provided on the transaction, the Activity Risk is calculated as the highest of these factors.

Determining Activity Risk on Settlement Instructions

The Activity Risk calculated for Settlement Instructions is from the point of view of the Account holding the instructions. Calculating Activity Risk on Settlement Instructions follows a similar approach as Front Office Transactions whereby the Entity risk is calculated for each party and then used to calculate Activity Risk; however, on Settlement Instructions, the Entity Risks for each party are not stored. The Entity Risks are calculated as follows:

Destination Customer Entity Risk

The Destination Customer Entity Risk is calculated using the following hierarchical rules:

  1. If the Destination Customer Account Effective Risk is non-zero, then set the Destination Customer Entity Risk to Destination Customer Account Effective Risk.
  2. If the Destination Financial Institution Effective Risk is non-zero, then set the Destination Customer Entity Risk to Destination Financial Institution Effective Risk.
  3. If the Destination Customer Name Risk ³ Destination Financial Institution Name Risk, then set the Destination Customer Entity Risk to Destination Customer Name Risk.
  4. If the Destination Financial Institution Name Risk > Destination Customer Name Risk, then set the Destination Customer Entity Risk to Destination Financial Institution Risk.
  5. Set the Destination Customer Entity Risk to zero(0).
Physical Delivery Party Entity Risk

The Physical Delivery Party Entity Risk is calculated using the following hierarchical rules:

  1. If the Physical Delivery Account Effective Risk is non-zero, then set the Physical Delivery Party Entity Risk to Physical Delivery Account Effective Risk.
  2. If the Physical Delivery Financial Institution Effective Risk is non-zero, then set the Physical Delivery Party Entity Risk to Physical Delivery Financial Institution Effective Risk.
  3. If the Physical Delivery Geography Risk is non-zero, then set the Physical Delivery Party Entity Risk to the Physical Delivery Geography Risk.
  4. Set the Physical Delivery Party Entity Risk to zero(0).

The final Activity Risk setting on the Settlement Instruction is the highest level of the following risks:

  • Destination Customer Entity Risk
  • Physical Delivery Party Entity Risk
  • Settlement Country Geography Risk
  • Product Risk
  • Channel Risk

This final Activity Risk is used in scenarios to determine the risk level of the Settlement Instruction without regard to the risk factors inherent in the Account holding the Instruction.