MORNBFI Vol. 1 - Planters Development Bank

APP. Q-1509.12.31RISK MANAGEMENT GUIDELINES FOR DERIVATIVES[Appendix to Sec. 4611Q (2008-4603Q)]I. IntroductionThis appendix, together with theGuidelines on Supervision by Risk(Appendix Q-42) and other BSP issuanceson management of the different risksattendant to FI activities, provides aframework on which an FI can establish itsrisk management activities. Accordingly,this set of risk management guidelines forderivatives should be read and used inconjunction with all related BSP issuanceson risk management.An FI, in using these guidelines toevaluate the propriety and adequacy of itsrisk management, must consider thefollowing principles:a. No single risk managementsystem for derivatives is expected to workfor all FIs considering that the structureand level of derivatives activities will varyfrom one FI to another. Each FI shouldapply the principles set in these guidelinesin a manner appropriate to its needs andcircumstances. The BSP shall evaluate thequality of an FI’s risk management systembased on the principles and minimumrequirements of these guidelines, scaledto the derivatives activities beingundertaken.b. The requirements prescribed inthese guidelines are merely minimumstandards and therefore, should not be takenas the “be-all” for all FI’s risk management.The Board of Directors (“BOD”) has theresponsibility of ensuring that an FI’s riskmanagement system appropriately capturesits risk exposures and affords propermanagement of these.II. Risks associated with derivativesWhile derivatives primarily helpmanage existing and anticipated risks,derivatives themselves are exposed to therisks they are designed to manage.Moreover, simple derivatives, whencombined with other financial instruments,may result in a structure that exposes an FIto complicated risks. Thus, derivatives canaggravate the risks of FIs and ofcounterparties if derivatives are not clearlyunderstood and properly managed.A single derivatives product may exposean FI to multiple risks as enumerated underSection III of Appendix Q-42. Thesecategories are not mutually exclusive ofeach other. Hence, derivatives activitiesmust be managed with consideration of allof these risks.III. Risk management process forderivativesThe management of derivatives activitiesshould be integrated into an FI’s overall riskmanagement system using a conceptualframework common to the FI’s otherbusinesses. For example, price risk exposurearising from derivatives transactions shouldbe assessed in a manner comparable to andaggregated with all other price riskexposures. Risk consolidation is particularlyimportant because the various riskscontained in derivatives and other marketactivities can be interconnected and maytranscend specific markets.At a minimum, the risk managementprocess for derivatives should be able to:a. Identify the risks arising from itsderivatives activities in whatever capacityit deals with the same. An FI must likewiseidentify the impact of its derivatives activitieson its overall risk profile. To properlyidentify risks, an FI must understand thederivatives products with which it istransacting and the factors that affect them.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 1