MORNBFI Vol. 1 - Planters Development Bank

APP. Q-1509.12.31management responses. At a minimum,policies should require the evaluation ofsignificant underlying algorithms andassumptions before the model is put inregular use, and as market conditionswarrant thereafter. Such internal evaluationshould be conducted by parties who, wherepracticable, are independent of the businesssector using or developing the model. Theevaluation may, if necessary, be conductedor supplemented with reviews by qualifiedoutside parties, such as experts in highlytechnical models and risk managementtechniques.(2) Limits structureAn FI must specify individual limits forall types of risks involved in an FI’sderivatives activities. An FI should use avariety of limits to adequately capture therange of risks or to address risks that themeasurement system does not capture.These limits should be integrated into theFI-wide limit structure to ensure consistencywith the BOD-approved risk appetite andbusiness strategy.The limit structure should be realistictaking into consideration the target budget,level of earnings and capital. Limits must bedocumented and promptly communicated toall relevant personnel. Limits must be reviewedat least annually or more frequently, ifcircumstances warrant, in order to ensure thatlimits reflect the FI’s past performance andcurrent position.Limits should be continually analyzedas regards its impact on target income,earnings and capital. These analyses shouldbe submitted/reported to the BOD. Anyexcess over the limit must be approved onlyby authorized personnel and immediatelyreported to senior management anddepending on the seriousness, also to theBOD. The seriousness of limit exceptionsdepends upon management’s approachtowards setting limits and on the actual sizeof individual and organizational limitsrelative to the FI’s capacity to take risks. AnFI with relatively conservative limits mayencounter more exceptions to those limitsthan that with less restrictive limits. Theremust also be mechanisms for the correctionof breach of these limits.An FI’s limit structure should addressthe following:(a) Definition of a credit exposure;(b) Maximum credit exposure to anindividual counterparty;(c) Credit concentrations;(d) Maximum nominal exposure:(i) Per trader and per transaction; and(ii) Position limits(e) Approved credit risk mitigationtechniques; and(f) Appropriate loss exposure triggers:(i) Loss alert;(ii) Stop loss;(iii) Value-at-risk; and(iv) Earnings-at-risk(3) MonitoringMonitoring of risk exposures, marketconditions, and trading positions should bedone at least daily. Derivatives instrumentsare highly influenced by movements inmarket factors. Thus, an FI must have amechanism that can track and analyze theeffect of market movements on its derivativesexposures. To ensure proper monitoring ofrisks, an FI is expected to have technologyand systems that can (a) track movementsin reference variables (underlying) and othermarket factors affecting the value of thederivatives instruments, such as triggerevents; and (b) incorporate observed marketmovements into the pricing and valuationof derivatives instruments.While monitoring is undertakenindependently from the personnel conductingderivatives activities, FI traders are expectedto actively monitor their positions to ensurethat they do not breach their limits. FI tradersshould not wait until a limit is breached toalert senior management and risk controlunits. Instead, traders should promptly reportunanticipated changes and progressivelyManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 5