Policy Framework
All banks should establish specific policies on market
risk management.
The policies should represent :
The policies should cover the following minimum requirements. The responsibilities of
Risk Management Committee with regard to market risk management aspects:
- setting policies and guidelines for market risk measurement, management and reporting
- ensuring that market risk management processes (including people, systems, operations, limits and controls) satisfy bank’s policy
- reviewing and approving market risk limits, including triggers or stop-losses for traded and accrual portfolios
- ensuring certification of financial models – through appointment of qualified and competent staff – and the effectiveness of all systems used to calculate market risk
The responsibilities of Risk Taking Unit and Line Management: - managing all aspects of market risk in accordance with approved policies as established by Risk Policy Committee
- ensuring that people in the Risk Taking Unit have the capability and capacity to meet their business objectives
- operating each Risk Taking Unit at all times at acceptable levels as defined by internal audits and self-assessments
- maintaining independent checks and balances through Operations (back-office)
- maintaining the integrity of financial reporting through financial control department
- establishing a process to identify all market risk
- operating within approved Price and Liquidity Risk limits, etc.
The Responsibilities of Market Risk Manager: - ensuring that Traders and Operations (back-office) are properly applying all policies and procedures with respect to market risk
- immediately advising Line Management and if material, the Risk Policy Committee, should any of those policies and procedures not be observed, and reducing or curtailing business activity until they have been restored
- ensuring that usage of risk limits accurately reflects current or expected market conditions by making changes, amending the volatility used in
calculation of Value-At-Risk to capture changes in market liquidity
Risk Identification - All Risk Taking Units must operate within an approved, current Market Risk Product Programme; this should define procedures, limits and controls for all aspects of the product.
- New products may operate under a Product Transaction Memorandum on a temporary, not more than one year, basis while a full Market Risk Product Programme is being prepared. At the minimum this should include procedures, limits and
controls. The final product transaction program should include market risk measurement at an individual product and aggregate portfolio level.
Limits and Triggers - All trading
transactions will be booked on systems capable of accurately calculating relevant sensitivities on a daily basis; usage of Sensitivity and Value at Risk limits for trading portfolios and limits for accrual portfolios (as prescribed for ALM) must be measured daily. Where market risk is not measured daily, Risk Taking Units must have procedures that monitor activity to ensure that they remain within approved limits at all times.
- Mandatory market risk limits are required for Factor Sensitivities and Value at Risk for mark to market trading and appropriate limits (to be determined) for accrual positions including Available-for-Sale portfolios. Requests for limits will be submitted annually for approval by the Risk Policy Committee. The approval will take into consideration the Risk Taking Unit's capacity and capability to perform within those limits evidenced by the experience of the Traders, controls and risk management, audit ratings and trading revenues.
- Approved Management Action Triggers or Stop-loss are required for all mark to market risk taking activities.
Trading - All trading activities will be conducted on an arm’s length basis in a manner conforming to applicable legal, tax, regulatory and accounting provisions of the country as well as to bank’s own internal policies and procedures.
- Traders may only enter into transactions with counterparties or trade in secondary market debt, equity and forex instruments if the counterparties and the issuers have been approved. All transactions will be executed at market rates, prevailing at the time the transaction was entered into. All transactions must have complete documentation, both for the transaction and for the counterparty; sales of derivative and structured products must comply with requirements for Suitability and Appropriateness.
- Brokers must be on an annually approved list maintained by Risk Taking Unit. The list of
brokers should be recommended by the risk taking unit but the candidature
of each brokers needs to be independently verified taking into account the financial stability of the
broker and feedback from market participants.
Risk Monitoring - A rate reasonability process is required to ensure that all transactions are executed and revalued at prevailing market rates; rates used at inception or for periodic marking to market for risk management or accounting purposes must be independently verified.
- Financial Models used for revaluations for income recognition purposes or to measure or monitor Price Risk must be independently tested and certified.
- Stress tests must be performed.
Models of analysis Line Management must ensure that the software used in Financial Models that value positions or measure market risk has independent certification that it is performing appropriate calculations accurately.
The Risk Policy Committee is responsible for administering the model control and certification policy, providing technical advice through qualified and competent personnel, and maintaining a register of qualified certifiers.
Financial Models must be fully documented to qualify for certification