Westpac Group Pillar 3 Report March 2013 - Iguana IR Sites

PILLAR 3 REPORT
EQUITY RISK
Equity risk is defined as the potential for financial loss arising from movements in equity values. The disclosures in
this section exclude investments in equities made by Westpac subsidiaries outside the regulatory Level 2 group.
Structure and organisation
Any changes to the portfolio and transactional limits for Westpac’s direct equity investments are approved under
delegated authority from the Westpac Board. The BRMC also approves the Equity Risk Management framework.
Approach
Westpac has established a comprehensive set of policies defining the management of equity risk. These policies
are reviewed and approved annually.
Risk mitigation
Westpac does not use financial instruments to mitigate its exposure to equities in the banking book.
Banking book positions
Equity underwriting and warehousing risk - As a financial intermediary Westpac underwrites listed and unlisted
equities. Equity warehousing activities require the acquisition of assets in anticipation of refinancing through a
combination of senior, mezzanine and capital market debt and listed, unlisted and privately placed equity.
Investment securities - Westpac undertakes, as part of the ordinary course of business, certain investments in
strategic equity holdings and over time the nature of underlying investments will vary.
Measurement of equity securities - Equity securities are generally carried at their fair value. Fair value for
equities that have a quoted market price (in an active market) is determined based upon current bid prices. If a
market for a financial asset is not active, fair value is determined based upon a valuation technique. This includes
the use of recent arms-length transactions, discounted cash flow analysis, option pricing models and other
valuation techniques commonly used by market participants to price similar instruments. In the event that the fair
value of an unlisted security cannot be measured reliably, these investments are measured at cost.
Where the investment is held for long term strategic purposes, these investments are accounted for either as
available for sale, with changes in fair value being recognised in equity, or at fair value through profit and loss.
Other related matters
For the periods reported the book value of certain unlisted investments are measured at cost because the fair
value cannot be reliably measured. These investments represent minority interests in companies for which
active markets do not exist and quote prices are not available. For all other equity exposures book value equals
fair value.
Fair value should not differ to the listed stock price. Should a listed stock price not be available, it is estimated
using the techniques referred to above.
Risk reporting
Westpac manages equity risk in two ways, VaR limits and investment limits:
A VaR limit (in conjunction with structural limits) is used to manage equity risk in the equity trading business in
Financial Markets. This limit is a sub-limit of the BRMC approved VaR limit for Financial Markets trading
activities; and
Investment exposures are reported monthly.
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