Technical Guide on Internal Audit of Treasury ... - CAalley.com

<strong>Technical</strong> <strong>Guide</strong> on Internal Audit of Treasury Function in Banks
Mid-office
4.4 The mid-office can be considered to be the conscience keeper of the
treasury. It is responsible for the critical functions of independent market risk
monitoring, measurement, analysis and reporting for the bank's Asset-
Liability Management Committee (ALCO). Ideally, this is a full time function of
reporting to, or encompassing the responsibility for, acting as Asset-Liability
Management Committee (ALCO)'s secretariat. An effective mid-office
provides independent risk assessment which is critical to Asset-Liability
Management Committee (ALCO)'s key function of controlling and managing
market risks in accordance with the mandate established by the Board/Risk
Management Committee. It is a highly specialised function and must include
trained and competent staff, and expert in market risk concepts.
4.5 The methodology of analysis and reporting will vary from bank to
bank depending on their degree of sophistication and exposure to market
risks. These same criteria will govern the reporting requirements demanded
of the mid-office, which may vary from simple gap analysis to computerized
VaR modeling. Mid-office staff may prepare forecasts (simulations) showing
the effects of various possible changes in market conditions related to risk
exposures. Banks using VaR or modeling methodologies should ensure that
its Asset-Liability Management Committee (ALCO) are aware of and
understand the nature of the output, how it is derived, assumptions and
variables used in generating the outcome and any shortcomings of the
methodology employed. Segregation of duties principles must be evident in
this function which must report to Asset-Liability Management Committee
(ALCO) independently of the treasury function.
4.6 The main functions of mid-office can be summarized as under:
(i)
Management of risks:
(a)
Market risk which arises on account of:
- Interest rate movement
- Foreign exchange rate movement
- Commodity prices
- Equity prices
18