MORNBFI Vol. 1 - Planters Development Bank

APP. Q-1509.12.31A risk control unit should regularlyevaluate risk-taking activities by assessing risklevels and the adequacy of risk managementprocesses. It should also monitor thedevelopment and implementation of controlpolicies and risk measurement systems. Itshould analyze daily reports produced by theFI’s risk measurement model, including anevaluation of the relationship betweenmeasures of risk exposure and trading limits.Risk control personnel staff should periodicallycommunicate their observations to seniormanagement and the BOD.An FI’s control structure shall beconsidered sound if all the followingelements are present:(a) Formal approval process for newproductsAn FI should have an effective processto evaluate and review risks involved inproducts that are either new to the FI or newto the market and of potential interest to theFI. An FI that desires to engage in newproducts and transactions must first subjectthese products and transactions to a rigorousreview and approval process. This willensure that all FI personnel involved in theactivity have sufficient knowledge of theproduct or transaction, and that theensuing risk exposures can be identified,measured and analyzed. The process mustbe contained in a BOD-approved policythat is fully documented and must beimplemented consistently and withintegrity.Before initiating a new derivativesactivity, all relevant personnel shouldunderstand the product. Risks arising fromthe new product should be integrated intothe FI’s risk measurement and controlsystems. The new product approval processshould include a sign-off by all relevantareas such as risk control, operations,accounting, legal, audit, and seniormanagement and trading operations.Defining a product or activity as “new”is central to ensuring that variations onexisting products receive the proper reviewand authorization. Factors that should beconsidered in classifying a product/activityas “new” include: capacity changes(e.g., end-user to dealer), structure variations(e.g., non-amortizing swap versusamortizing interest rate swap), productswhich require a new pricing methodology,legal or regulatory considerations, or marketcharacteristics (e.g., foreign exchangeforwards in major currencies as opposedto emerging market currencies).An FI should introduce new productsin a manner that adequately limits potentiallosses and permits the testing of internalsystems.(b) Segregation of functions/unitssubject to conflict of interestAn FI must separate the business unitconducting the derivatives activities fromthe unit/s tasked with the checking,accounting, reporting and control functionsof its derivatives activities.An FI should have policies andprocedures addressing conflicts ofinterest, particularly among the followingfunctions: proprietary trading, sales ormarketing desks/units, personal trading,and asset management.An FI that conducts derivatives activitieswith its subsidiaries and/or affiliates mustestablish policies and procedures to avoidactual, or even the appearance of a conflictof interest. Off-market rates between relatedparties should generally be forbidden.An FI should avoid dealing intransactions conducted at off-market rates.An FI should have internal policies definingwhat constitutes “market rates” and identifythe range of deviation from the benchmarkrates which could still be considered as“market rates”. The FI’s monitoring systemshould be able to alert management of anybreaches in the rate tolerance levels and theappropriate action that should be taken. AnFI must be able to justify any off-markettransaction.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 7