MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4308.12.31GUIDELINES ON MARKET RISK MANAGEMENT[Appendix to Sec. 4174Q (2008 - 4194Q), 4194S, 4194P and 4194N]I. BackgroundThe globalization of financial markets,increased transaction volume and volatility,and the introduction of complex productsand trading strategies have made market riskmanagement take on a more important rolein risk management. FIs now use a widerange of financial products and strategies,ranging from the most liquid fixed incomesecurities to complex derivativeinstruments and structured products. Therisk dimensions of these products andstrategies must be fully understood,monitored, and controlled by a FI.II. Statement of policyFor purposes of these guidelines, FIsrefer to banks and NBFIs supervised by theBSP and their respective financialsubsidiaries. The level of market riskassumed by an FI is not necessarily aconcern, so long as the FI has the ability toeffectively manage the risk. Therefore, theBSP will not restrict the level of riskassumed by an FI, or the scope of itsfinancial market activities, so long as theFI is authorized to engage in such activitiesand:• Understands, measures, monitorsand controls the risk assumed,• Adopts risk management practiceswhose sophistication and effectiveness arecommensurate to the risk being monitoredand controlled, and• Maintains capital commensuratewith the risk exposure assumed.If the BSP determines that an FI’s riskexposures are excessive relative to the FI’scapital, or that the risk assumed is not wellmanaged, the BSP will direct the FI to reduceits exposure to an appropriate level and/orstrengthen its risk management systems.Inevaluating the above parameters, the BSPexpects FIs to have sufficientknowledge, skills and appropriatesystem and technology necessary tounderstand and effectively manage theirmarket risk exposures. The principlesset forth in these guidelines shall be usedin determining the adequacy andeffectiveness of an FI’s market riskmanagement process, the level and trendof market risk exposure and adequacyof capital relative to exposure. The BSPshall consider the following factors:1. The major sources of market riskexposure and the complexity and level ofrisk posed by the assets, liabilities, and offbalance-sheetactivities of the FI;2. The FI’s actual and prospective levelof market risk in relation to its earnings,capital, and risk management systems;3. The adequacy and effectiveness ofthe FI’s risk management practices andstrategies as evidenced by:• The adequacy and effectiveness ofboard and senior management oversight;• Management’s knowledge andability to identify and manage sources ofmarket risk as measured by past andprojected financial performance;• The adequacy of internalmeasurement, monitoring, andmanagement information systems;• The adequacy and effectiveness ofrisk limits and controls that set toleranceson income and capital losses;• The adequacy and frequency of theFI’s internal review and audit of its marketrisk management process.Further, an FI’s market risk managementsystem shall be assessed under the FI’sgeneral risk management framework,consistent with the guidelines onsupervision by risk as set forth underAppendix Q-42.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 1