35. Commercial banks shall develop counterparty due diligence standards and procedures for their business practices in the PFTZ, which entails analysis of counterparties’ trading strategies, market position, off-balance-sheet transactions, risk management strategies and risk tolerance, in addition to their financial data.

36. Commercial banks shall have in place an internal assessment or rating system of counterparty risk to complement external rating results.

37. Headquarters of commercial banks shall have in place a counterparty approval and management system for all business activities and disallow any transaction without approval concerning counterparty credit risk.

38. During transactions with approved counterparties, commercial banks shall collect counterparty risk information on an ongoing basis and conduct regular risk assessment focusing on the impacts of major market changes on counterparty risk. They should identify the criteria for collecting overseas counterparty risk information and the methods and procedures of continuous assessment, taking into full account possible difficulties in information collection.

39. Commercial banks shall adopt counterparty credit risk measurement methods appropriate to the complexity of their business activities in the PFTZ. Their measurement models needs to cover all business practices and products from which counterparty credit risk may arise and measure accurately counterparties’ default risk, potential exposure degrees and credit value adjustments, taking into full consideration the impacts of liquidity risk, market risk and operational risk on counterparty credit risk while keeping a conservative approach to the measurement. These models shall be verified on an ongoing basis to ensure the accuracy of measurement results.

40. Commercial banks shall have in place different limits systems for their business practices in the PFTZ according to the categories of counterparties, products, markets, risk sources (e.g. interest rate or exchange rate) and exposure types (e.g. credit value adjustments, current exposures or potential future exposures), and the limits shall be set respectively taking into full account the stress testing results.

VI. Country Risk

41. Commercial banks shall identify their management strategies, policy process and risk preferences in terms of country risk.

42. Commercial banks shall develop country risk management policies appropriate to the nature, scope and complexity of their business practices in the PFTZ with a proper degree of forward-lookingness, including but not limited to:

(1) Definition of country risk that satisfies regulatory requirements;

(2) Organizational structure, terms of reference and responsibilities in country risk management;

(3) Procedures to identify, measure, monitor and control country risk related with business activities in the PFTZ;

(4) Limits system and control measures for country risk related with business activities in the PFTZ;

(5) Stress tests and emergency response plans for country risk related with business activities in the PFTZ.