2012 Registration document and annual financial report - BNP Paribas

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5RISKSAND CAPITAL ADEQUACYMarket risk5.7 Market riskMARKET RISK RELATED TO TRADING ACTIVITIES5INTRODUCTION [A udited]Market risk, as defined in chapter 5.3, arises mainly from tradingactivities carried out by the Fixed Income and Global Equity & CommodityDerivatives teams within Corporate and Investment Banking andencompasses different risk factors defined as follows:■ interest rate risk is the risk that the value of a financial instrumentwill fluctuate due to changes in market interest rates;■ foreign exchange risk is the risk that the value of an instrument willfluctuate due to changes in foreign exchange rates;■ equity risk arises from changes in the market prices and volatilities ofequity shares and/or equity indices;■ commodities risk arises from changes in the market prices andvolatilities of commodities and/or commodity indices;■ credit spread risk arises from the change in the credit quality of anissuer and is reflected in changes in the cost of purchasing protectionon that issuer;■ option products carry by nature volatility and correlation risks, forwhich risk parameters can be derived from option market pricesobserved in an active market.ORGANISATION PRINCIPLES [A udited]GovernanceThe market risk management system as well as financial products pricingaims to track and control market risks whilst ensuring that the Controlf unctions remain totally independent from the business lines.In terms of market risk management, Risk-Investment and Markets (Risk-IM)’s responsibility is to define, monitor and analyse risk sensitivities andrisk factors, and to measure and control Value at Risk (VaR), which is theglobal indicator of potential losses. Risk-IM ensures that all businessactivity complies with the limits approved by the various committees andapproves new activities and major transactions, reviews and approvesposition valuation models and conducts a monthly review of marketparameters (MAP review) in association with the Valuation and RiskControl Department (V&RC).Market Risk monitoring and pricing is structured around severalcommittees:■ the Capital Markets Risk Committee (CMRC) is the main committeegoverning the risks related to capital markets. It is responsible foraddressing, in a coherent manner, the issues related to marketand counterparty risk. The CMRC follows the evolution of the mainexposures and stress risk and sets the high level trading limits. Itmeets approximately monthly and is chaired by either the Group CEOor by one of the Bank’s COOs;■ the Product and Financial Control Committee (PFC) is the arbitrationand pricing decision-making Committee. It meets quarterly anddiscusses the conclusions of the CIB Financial Control teams andtheir work to enhance control effectiveness and the reliability of themeasurement and recognition of the results of market transactions. Itis chaired by the Group Chief Financial Officer and brings together theDirectors of Group Finance-Accounting, Corporate Investment Bankingand Group Risk Management;■ at business unit level, the Valuation Review Committee (VRC) meetsmonthly to examine and approve the results of Market parametersreview (MAP review) and any changes in reserves. The ValuationReview Committee also acts as the referee in any disagreementsbetween trading and Control f unctions. The committee is chaired bythe Senior Trader and other members include representatives fromtrading, GRM, Valuation and Risk Control Group, and Group Finance.Any disagreement is escalated to the PFC;■ the Valuation Methodology Committee (VMC) meets 2 to 3 timesa year per business line to monitor model approvals and reviews,follow up relevant recommendations and present model governanceimprovements.Risk monitoring set up and limit settingThe Group uses an integrated system called Market Risk eXplorer(MRX) to follow the trading positions on a daily basis and manage VaRcalculations. MRX not only tracks the VaR, but also detailed positionsand sensitivities to market parameters based on various simultaneouscriteria (currency, product, counterparty). MRX is also configured toinclude trading limits, reserves and stress tests.Responsibility for limit setting and monitoring is delegated at threelevels, which are, in decreasing order, CMRC, Business Line and Activity(Head of a Trading Book). Limits may be changed either temporarilyor permanently, in accordance with the level of delegation and theprevailing procedures. Appropriate escalation mechanisms are in placeto ensure that the independent view from the Risk Function on the levelof limits is heard.2862012 Registration document and annual financial report - BNP PARIBAS
RISKS AND CAPITAL ADEQUACYMarket risk5Core Risk Analysis and Reporting to ExecutiveManagementRisk-Investment and Markets reports, through various risk analysis andreports, to Executive Management and business lines Senior Managementon its risk analysis work (limit, VaR monitoring, core risk analysis…). TheGlobal Risk Analysis and Reporting team is responsible for compiling/circulating main global risk reports.The following risk reports are generated on a regular basis:■ weekly “Main Position” reports for each business line (equityderivatives, commodities, credit, fixed income and currencyderivatives), summarising all positions and highlighting items needingparticular attention; these reports are mainly intended for businessline managers;■ monthly local “bottom up” stress testing report for ExecutiveManagement identifying key risk concentrations around the globe;■ supporting documentation for the core capital markets risk committeecomprising markets and risk event summaries, global counterpartyexposure summary, VaR/Stressed VaR evolution, Stress Testingand Capital evolution summaries, market and counterparty riskbacktesting);■ geographical and global risk dashboards;■ Credit Valuation Adjustment Reporting for coverage of the core CVAmarket and counterparty risk sensitivities.VALUATION CONTROL [A udited]The financial instruments that are part of the prudential Trading Bookare valued and reported at market or models v alue through P/L, incompliance with applicable accounting standards. Such can also be thecase of financial instruments classified in the banking book.The valuation control is insured within the Charter of Responsibility onValuation, defining how responsibilities are split as well as the creationof a dedicated Valuation and Risk Control team (V&RC) who shares thecontrol of market parameters with Risk-IM. These policies and governanceapplies to all CIB Market Activities (Fixed Income, GECD, RPM) and is beingextended to ALM Treasury.In addition to the Charter of Responsibilities, the relevant valuationcontrols are detailed in specific policies. We detail below the mainprocesses that form together the valuation control governance.Transaction accounting controlThis control is under the responsibility of Middle-Office within theOperations Department. However, certain complex transactions arecontrolled by Risk-IM.Market Parameter review – Independent PriceVerification.Price Verification is managed and shared by Risk-IM Department andValuation and Risk Control Department (V&RC), daily controls areperformed on the most liquid parameters and a comprehensive andformal review of all the market parameters is performed at monthend. The types of parameters controlled by V&RC are precisely listed,these are essentially the parameters for which an automatic controlagainst external sources can be implemented (security prices, vanillaparameters), this may include the use of consensus price services. Risk-IMis in charge of controlling valuation methodologies as well as the mostcomplex parameters that are very dependent on the choice of models.The general principles of the Market parameter reviews are described inthe Charter of responsibility on Valuation as well as specialised globalpolicies such as the Global marking and Independent Price VerificationPolicy. The specific methodologies are described in documents known asthe MAP Books organised by product lines and regularly updated. Theresponsibilities of Risk-IM and V&RC are defined for each point of timeand the conclusions of the Market Parameter reviews are documentedin the MAP review finding documents.The outcome of the m arket parameter review is the estimation ofvaluation adjustments communicated to Middle-Office who enters itin the book of account. The results are communicated to the Tradingmanagement during the Valuation review Committees, where arbitrationscan be made. The opinion of the Control f unctions prevails, however,significant and persistent disagreement can be escalated to the PFC.Model Approval and ReviewsThe governance of model controls is described in the v aluationMethodology Control Policy. Activity specific guidelines are detailed inthe m odel review guidelines documents for each product lines.Front-Office quantitative analysts design and propose the methodologiesused to value the product and measure the risks that are used totake trading decisions. Research team and IT are responsible for theimplementation of these models in the systems.The independent control of the valuation models is under theresponsibility of Risk-IM. The main processes are:■ the approval of models, by which a formal decision to approve orreject a model is taken following any modification of the valuationmethodology called a “Valuation Model Event”. In any cases, theapproval decisions is taken by a senior Risk-IM analyst. The reviewrequired by the approval decision can be fast track or comprehensive;in the latter case, the reasons and conditions of approval are detailedin a m odel a pproval document. If the approval requires a publicdiscussion, a Model Approval Committee can be gathered;■ the review of models can be conducted at inception (linked to anapproval) or during the life of a model (re-review); it consists of aninvestigation on the suitability of the model used to value certainproducts in the context of a certain market environment;■ the control of the use of set up of models, which is a continuous controlof the correct parameterisation or configuration of the models as wellas the adequacy of the mapping between products and models.52012 Registration document and annual financial report - BNP PARIBAS 287
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2012REGISTRATION DOCUMENTAND ANNUAL
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2012 Registration documentand annua
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1GROUP PRESENTATION1.1 Group presen
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GROUP PRESENTATIONPresentation of a
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1GROUPPRESENTATIONBNP Paribas and i
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1GROUPPRESENTATION1282012 Registrat
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2CORPORATEGOVERNANCEBoard of Direct
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2CORPORATEGOVERNANCEExecutive Commi
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32012REVIEW OF OPERATIONSBNP Pariba
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32012REVIEW OF OPERATIONSCore busin
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32012REVIEW OF OPERATIONSBalance sh
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32012REVIEW OF OPERATIONSProfit and
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32012REVIEW OF OPERATIONSOutlook3.6
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32012REVIEW OF OPERATIONSLiquidity
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4CONSOLIDATEDFINANCIAL STATEMENTS -
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5RISKSAND CAPITAL ADEQUACY5.6 Count
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5RISKSAND CAPITAL ADEQUACYAnnual ri
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5RISKSAND CAPITAL ADEQUACYCapital m
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6INFORMATIONON THE PARENT COMPANY F
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7ARESPONSIBLE BANK: INFORMATION ON
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8GENERALINFORMATIONDocuments on dis
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8GENERALINFORMATIONFounding documen
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8GENERALINFORMATIONStatutory Audito
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8GENERALINFORMATIONStatutory Audito
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9STATUTORYAUDITORSStatutory Auditor
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10PERSON RESPONSIBLE FOR THE REGIST
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11TABLE OF CONCORDANCEHeadings as l
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HEAD OFFICE16, boulevard des Italie
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