As $150 billion General Electric Co. grew its business and expanded its book of derivatives used for hedging foreign currency and interest-rate exposures, the number of highly rated counterparties with which it could do business remained static. That meant that GE, by 2004, was approaching credit thresholds, and expected future growth could pose problems. If GE reached the limit on the credit exposure it could have with a given derivatives dealer, it might have to cut back on trading with that counterparty to stay within its exposure cap. If the bank with which it was trading derivatives contracts reached its limit on credit exposure to GE, the bank would have to allocate more capital to back up additonal exposure–a cost it would pass on to GE. "Our existing structure could have limited GE treasury's ability to hedge efficiently," notes Dennis Sweeney, deputy treasurer.

To open up room to grow, GE organized a new legal entity called GE Financial Markets. GEFM now serves as GE's primary face to the financial markets for FX and interest-rate derivatives. Every dealer has most of its exposure to GEFM. GEFM executes derivatives trades with GE affiliates and then, to the extent that there is a consolidated exposure, GEFM enters into offsetting positions in the external market. "With collateral agreements in place, the exposure each party has to the other is capped by the threshold on the collateral agreement," explains Rob Ceske, chief risk manager in GE's corporate treasury. Overall, the new subsidiary and strategy could reduce banks' potential exposure to GE by as much as $10 billion and free up capital for other purposes. For GE, the change means net savings of about $25 million annually in fewer credit charges and better prices from counterparties. "It gives us the scale to implement better systems, stronger controls and improved performance metrics," Sweeney concludes.