2012 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