MORNBFI Vol. 1 - Planters Development Bank

APP. Q-1509.12.31Considering that changes in the value ofderivatives are highly influenced by changesin market factors, risk identification shouldbe a continuing process and should occurat both a transaction and portfolio level.b. Measure the risks arising from itsderivatives activities. An FI must havemeasurement models or tools to quantifythe risks identified. These measurementtools should be suitable to the nature andvolume of an FI’s derivatives activities. Asthe complexity and volume of the derivativesactivity increases, the measurement toolsshould correspondingly be moresophisticated. The primary criteria for thepropriety of the measurement tools areaccuracy, timeliness, efficiency andcomprehensiveness with which these toolscan capture the risks involved and theircontribution to the decision-making processof FI management.c. Monitor the risks arising from itsderivatives activities. Derivatives productsare very sensitive to market factors, whichcontinually change. Thus, an FI should havea mechanism to monitor the responsivenessof derivatives to market factors to enable itto review and assess its risk positions. Inorder to effectively monitor the risks, reportsmust be timely generated in order to aidmanagement in determining whether thereis need to adjust the FI’s derivativespositions.d. Control the risks arising from itsderivatives activities. An FI must establishlimits to its derivatives exposure. Theselimits should be comprehensive and alignedwith an FI’s overall risk tolerance. An FI’spolicies and procedures on control shouldprovide for contingencies when limits arebreached. An FI must allot lead time andhave a mechanism that enablesmanagement to act in time to controlunacceptable or undesired exposures. AnFI must also establish a system thatseparates functions susceptible to conflictsof interest.IV. Sound risk management practices forderivativesConsistent with the criteria for soundrisk management practices in Section V ofAppendices Q-43 and Q-44, the BSP shallassess the propriety and adequacy of an FI’srisk management system for its derivativesactivities in accordance with the followingbasic principles.a. Active and appropriate board andsenior management oversightAn FI’s BOD must set the general policyor the policy direction relating to themanagement of an FI’s risks, including thosearising from its derivatives activities. Thispolicy should be consistent with the FI’sbusiness strategies, capital strength,management expertise and risk profile.Accordingly, the BOD must understand thenature and purpose of the FI’s derivativesactivities and the role derivatives play in theFI’s overall business strategy. Passive BODapproval is not acceptable. There must beverifiable evidence of the BOD approvalprocesses and that senior managementexerted effort to explain the nature andpurpose of the derivatives activities to theBOD (e.g. minutes of BOD meetingsdocumenting presentations and reports tothe BOD and the approval processes).The BOD must review and pre-approvenew derivatives products as well assignificant related policies and procedures.Central to the approval of new products isdefining when a product or activity is newin order to ensure that variations on existingproducts receive the proper review andauthorization. Policies should also detailauthorized activities (e.g., at what stagesapprovals should be obtained, from whomapprovals should be obtained), those thatrequire on-time approval and those that areconsidered inappropriate.The BOD must be apprised of the FI’sderivatives exposures on a timely basis inorder to enable the BOD to act on suchexposures accordingly. Consequently, thereQ RegulationsAppendix Q-15 - Page 2Manual of Regulations for Non-Bank Financial Institutions