Financial Statements - United Bank Limited

NOTES TO AND FORMING PART OF THE UNCONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2012
- Review the Derivatives Business Policy and recommend approval to the BRMC / BoD
- Review and approve derivatives product programs
- Authorize changes in procedures and processes regarding derivatives and structured products
Overall responsibility for derivatives trading activity lies with the Treasury and Capital Markets Group. Measurement &
monitoring of market and credit risk exposure and limits and its reporting to the senior management and the BoD is
done by Treasury Middle Office (TMO), which also coordinates with the business regarding approvals for derivatives
risk limits. Treasury Operations records derivatives activity in the Bank’s books, and handles its reporting to the SBP.
Derivatives risk management
There are a number of risks undertaken by the Bank, which need to be monitored and assessed.
Credit risk
Credit risk refers to the risk of non-performance or default by a party to a derivatives transaction, resulting in an
adverse impact on the Bank’s profitability. Credit risk associated with derivatives transactions is categorized into
settlement risk and pre-settlement risk. Credit proposals for derivatives transactions are approved by the Credit
Committee. The credit exposure of each counterparty is estimated and monitored by Treasury Middle Office on a daily
basis.
Market risk
The Bank, as a policy, hedges back-to-back all Options transactions. In addition, the Bank does not carry any
exchange risk on its Cross Currency Swaps portfolio as it hedges the exposure in the interbank market. To manage
the interest rate risk of Interest Rate Derivatives, the Bank has implemented various limits which are monitored and
reported by Treasury Middle Office on a daily basis.
Liquidity risk
Derivatives transactions, usually being non-funded in nature, do not carry a specific funding liquidity risk.
The liquidity risk arises from the fact that in Pakistan interest rate derivatives generally have a uni-directional demand,
and no perfect hedge is available. The Bank mitigates its risk by limiting the portfolio in terms of tenor, notional and
sensitivity limits, and can also hedge its risk by taking on and off balance sheet positions in the interbank market,
where available.
Operational risk
The staff involved in the trading, settlement and risk management of derivatives are carefully trained to deal with the
complexities involved in the process. Adequate systems and controls are in place to carry out derivatives transactions
smoothly. Each transaction is processed in accordance with the product program or a transaction memo, which
contains detailed accounting and operational aspects of the transaction to further mitigate operational risk. In addition,
the Treasury Middle Office and the Compliance and Control Department are assigned the responsibility of monitoring
any deviation from policies and procedures. The Bank’s Audit and Inspection Group also reviews this function, which
covers regular review of systems, transactional processes, accounting practices and end-user roles and
responsibilities.
The Bank uses a derivatives system which provides an end-to-end valuation solution, supports the routine
transactional process and provides analytical tools to measure various risk exposures, carry out stress tests and
sensitivity analysis.
Treasury Middle Office produces various reports on a periodic basis which are reviewed by senior management.
These reports provide details of the derivatives business profile containing outstanding positions, profitability, risk
exposures and the status of compliance with limits.
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