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Nacha creates broadly adopted payment and financial messaging rules and standards through consensus-led governance, international collaboration, and innovative development practices. We continually advance the ubiquitous ACH Network and engage diverse stakeholders to accelerate a digital future of global financial services interoperability.

RMAG Best Practices for Risk & Exposure Management: Part 1

Earlier this year the Nacha Risk Management Advisory Group (RMAG) conducted a survey of the methodologies used by Originating Depository Financial Institutions (ODFIs) to manage ACH risk in their client portfolios.  The intent of the survey was to use the results to develop educational materials and best practices for ODFIs to consider as they manage their client portfolios.  This is the first in a series of five articles, one for each of the five parts of the survey.
The following are the recommended best practices for Credit Risk Management & Policy:

  1. Make sure your policies address ACH risk: Depending on how your financial institution has structured its policies this may be in your Overall Credit Policy, Credit Risk Policy, Risk Management Policy, or in a specific ACH or ACH Risk Policy.
  2. Manage risk at the client relationship level:  It is important to know your overall exposure risk at the client relationship level.  Your management team may also want to look at your clients at a more detailed level such as by subsidiary corporation, division, or line of business within the overall client relationship.
  3. Have procedures in place for what to do when exposure limits are approached or breached:  These procedures should spell out clear “chain of command” responsibilities such as who should be contacted for review and/or approval when exposure limits are breached.  This should also include “who is the backup” when the primary contact is unable to be reached.
  4. Manage ACH exposure in coordination with other credit exposures:  In order to have an overall insight into the client, your financial institution should manage the ACH exposure in coordination with all other credit exposures to the client.  Many financial institutions indicated that they review their ACH exposure at the same time that they review other credit exposures for the client.
  5. Understand the key criteria for managing risk and which ones are most important to your organization:  The credit risk appetite of each financial institution is somewhat different and therefore the key criteria that your financial institution uses to manage risk as part of your credit underwriting process may be different.  Among the key criteria most frequently mentioned by the respondents were the following:
    • Credit worthiness (as defined by your organization)
    • New client vs. Existing client
    • Length of time the client has been with your financial institution
    • Self-Origination vs. being a Third Party Originator
    • Business Segment or Line of Business
    • Recent change in the client’s financial condition (as defined by your organization)

Please continue to follow Newslink for additional articles from the Nacha Risk Management Advisory Group on the best practices in risk and exposure management.