Volume 2 - IFC

FY09 FUNDING RISK HIGHLIGHTS
During FY09, IFC raised $9.1 billion, net of derivatives ($6.2 billion in FY08
and $3.0 billion in FY07). While funding costs compared to US$ LIBOR
increased significantly in the course of the year as credit spreads for IFC
widened, the terms achieved by IFC were in-line with those achieved by
its supranational peer group as a whole and charges on borrowings were
lower in FY09 when compared to FY08 as a result of the lower overall
interest environment.
MARKET RISK
IFC’s exposure to market risk is minimized by adopting the matchedfunding
policy noted above and by using derivative instruments to convert
assets and liabilities into floating rate US dollar assets and liabilities.
INVESTMENT OPERATIONS
Interest rate and currency exchange risk associated with fixed rate and/or
non-US dollar lending is hedged via currency and interest rate swaps that
convert cash flows into variable rate US dollar flows.
Exposures to market risk resulting from derivative transactions
with clients, which are intended to facilitate clients’ risk management,
are minimized by entering into offsetting positions with highly rated
market counterparties.
LIQUID ASSET PORTFOLIOS
The P0, P1 and P3 portfolios are managed to variable rate US dollar
benchmarks, on a portfolio basis. To this end, a variety of derivative
instruments are used, including short-term, over-the-counter foreign
exchange forwards (covered forwards), interest rate and currency swaps,
and exchange-traded interest rate futures and options. IFC also takes
both long and short positions in securities in the management of these
portfolios to their respective benchmarks.
The primary source of market risk in the liquid asset portfolios is the
P2 and P4 portfolios, which, in contrast, are managed to a three-year
duration US dollar benchmark, with additional flexibility to deviate from
the benchmark. P2 represents the portion of IFC’s capital not disbursed
as equity investments, and the benchmark reflects the chosen risk profile
for this uninvested capital. P4 represents an outsourced portion of the P2
portfolio. In addition, the P1 and P3 portfolios contain a degree of market
risk (e.g., spread risk).
BORROWING ACTIVITIES
Access to funding is maximized, and cost is minimized, by issuing debt
securities in various capital markets in a variety of currencies, sometimes
using complex structures. These structures include borrowings payable
in multiple currencies, or borrowings with principal and/or interest determined
by reference to a specified index such as a reference interest rate,
or one or more foreign exchange rates.
Market risk associated with fixed rate obligations and structured
instruments entered into as part of IFC’s funding program is generally
mitigated by using derivative instruments to convert them into variable
rate US dollar obligations, consistent with the matched-funding policy.
ASSET-LIABILITY MANAGEMENT
While IFC’s matched-funding policy provides a significant level of
protection against currency and interest rate risk, IFC can be exposed
to residual market risk in its overall asset and liability management. This
residual market risk is monitored by the Asset-Liability Management group
within the Treasury and Integrated Risk Management Departments.
Residual currency risk arises from events such as changes in the level of
non-US dollar loan loss reserves. This risk is managed by monitoring the
aggregate position in each lending currency and hedging the exposure
when the net asset or liability position exceeds $5 million equivalent.
Residual interest rate risk may arise from two main sources:
■ Assets that are fully match-funded at inception, which can become
mismatched over time due to write-downs, prepayments, or rescheduling;
and
■ Differing interest rate reset dates on assets and liabilities.
This residual risk is managed by measuring the sensitivity of the present
value of assets and liabilities in each currency to each basis point
change in interest rates, with an action trigger of $50,000 for a one basis
point parallel move in the yield curve.
FY09 MARKET RISK HIGHLIGHTS
Total liquid asset returns (comprising interest, realized and unrealized gains
and losses, and foreign currency transaction gains (losses)) were $474 million
in FY09 ($473 million in FY08 and $618 million in FY07), of which
$156 million was attributable to the P0, P1 and P3 portfolios ($93 million
in FY08 and $187 million in FY07), $318 million was attributable to the P2
and P4 portfolios ($345 million in FY08 and $306 million in FY07) 5 . The
overall market environment in FY09 and, in particular, the resulting impact
on the performance of IFC’s asset-backed and mortgage- backed securities
portfolios are discussed in more detail in “Results of Operations”.
Foreign currency transaction gains on non-trading activities for FY09
included in net income were $10 million ($39 million losses in
FY08 and $5 million losses in FY07). Foreign currency transaction losses
on investments in debt securities accounted for as available-for-sale for
FY09 included in Other Comprehensive Income (OCI) were $69 million
($85 million gains in FY08 and $22 million gains in FY07).
OPERATIONAL RISK
IFC defines operational risk as the potential for loss resulting from events
involving people, systems and processes. These include both internal and
external events, whether caused by a lack of controls, documentation, or
contingency planning, or by breakdowns in information systems, communications,
physical safeguards, business continuity, supervision, transaction
processing, or in the execution of legal, fiduciary, and agency responsibilities.
As such, operational risk covers the risks emanating from the manner
in which an entity is operated as opposed to the way it is financed.
Consistent with “Sound Practices for the Management and Supervision
of Operational Risk” issued by the Basel Committee on Banking Supervision
in February 2003, IFC is developing its operational risk framework to
enable a determination, for each area (people, systems and processes),
which risks IFC will: (i) manage internally, as part of its ongoing business;
(ii) mitigate through contingency planning; or (iii) transfer to third parties,
whether by subcontracting, outsourcing, or insurance.
Responsibility for the development of the framework for managing
and monitoring operational risk and for business management rests
with the Operational Risk Division of the Business Risk Department. With
respect to insurable operational risk, IFC’s Insurance Services Division,
also part of the Business Risk Department, performs insurance reviews
to identify underlying risks and assess the adequacy of existing corporate
insurance policies and limits.
IFC seeks to mitigate the risks it manages internally by maintaining a
comprehensive system of internal controls that is designed not only to
identify the parameters of various risks but also to monitor and control
those areas of particular concern.
5 In addition, FY08 income from liquid assets included $35 million from the P6 portfolio. Beginning in
FY09, income from the P6 portfolio ($42 million in FY09) is reported in other income.
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