MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4308.12.314. Comprehensive internal controlsand independent audits.The specific manner in which an FIapplies these elements in managing itsmarket risk will depend upon thecomplexity and nature of its activities, aswell as the level of market risk exposureassumed. What constitutes adequatemarket risk management practices cantherefore vary considerably. Regardlessof the systems used, the BSP will notconsider market risk to be well managedunless all four of the above elements aredeemed to be at least “satisfactory”.As with other risk factor categories,banking groups (banks and subsidiaries/affiliates) should monitor and manage marketrisk exposures of the group on a consolidatedand comprehensive basis. At the same time,however, FIs should fully recognize any legaldistinctions and possible obstacles to cashflow movements among affiliates and adjusttheir risk management practices accordingly.While consolidation may provide acomprehensive measure in respect ofmarket risk, it may also underestimate riskwhen positions in one affiliate are used tooffset positions in another affiliate. This isbecause a conventional accountingconsolidation may allow theoretical offsetsbetween such positions from which an FImay not in practice be able to benefitbecause of legal or operational constraints.A. Active and appropriate board andsenior management oversight 1Effective board and senior managementoversight of an FI’s market risk activities iscritical to a sound market risk managementprocess. It is important that these individualsare aware of their responsibilities withregard to market risk management and howmarket risk fits within the organization’soverall risk management framework.Responsibilities of the board of directorsThe board of directors has the ultimateresponsibility for understanding the natureand the level of market risk taken by theFI. In order to carry out its responsibilities,the Board should:1. Establish and guide the FI’s strategicdirection and tolerance for market risk.While it is not possible to provide acomprehensive list of documents toconsider, the BSP should see a clear anddocumented pattern whereby the Boardreviews, discusses and approves strategiesand policies with respect to market riskmanagement. In addition, there should beevidence that the Board periodicallyreviews and discusses the overallobjectives of the FI with respect to the levelof market risk acceptable to the FI.2. Identify senior management whohas the authority and responsibility formanaging market risk and ensure thatsenior management takes the necessarysteps to monitor and control market riskconsistent with the approved strategies andpolicies. The BSP should be able to discerna clear hierarchal structure with a clearassignment of responsibility and authority.3. Monitor the FI’s performance andoverall market risk profile, ensuring thatthe level of market risk is maintainedwithin tolerance and at prudent levelssupported by adequate capital. The Boardshould be regularly informed of the marketrisk exposure of the FI and any breachesto established limits for appropriate action.Reporting should be timely and clearly1This section refers to a management structure composed of a board of directors and senior management. The BSP isaware that there may be differences in some FIs as regards the organizational framework and functions of the board ofdirectors and senior management. For instance, branches of foreign banks have board of directors located outside of thePhilippines and are overseeing multiple branches in various countries. In this case, “board-equivalent” committees areappointed. Owing to these differences, the notions of the board of directors and the senior management are used inthese guidelines not to identify legal constructs but rather to label two decision-making functions within a FI.Q RegulationsAppendix Q-43 - Page 6Manual of Regulations for Non-Bank Financial Institutions