MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4308.12.31activities, relatively simple limits maysuffice. However, for FIs with significantholdings of long-term instruments, options,instruments with embedded options, orother structured instruments, more detailedlimit systems may be required.Depending on the nature of an FI’sholdings and its general sophistication,limits can also be identified for individualbusiness units, portfolios, instrument types,or specific instruments. The level of detailof risk limits should reflect thecharacteristics of the FI’s holdingsincluding the various sources of market riskthe FI is exposed to.The BSP also expects that the limitssystem will ensure that positions thatexceed predetermined levels receiveprompt management attention. Limitexceptions should be communicated toappropriate senior management withoutdelay. Policies should include how seniormanagement will be informed and whataction should be taken by management insuch cases. Particularly important iswhether limits are absolute in the sensethat they should never be exceeded orwhether, under specific circumstances,breaches of limits can be tolerated for ashort period of time. The circumstancesleading to a tolerance of breaches shouldbe clearly described.Market risk monitoring and reportingAn accurate, informative, and timelymanagement information system isessential for managing market riskexposures both to inform management andto support compliance with board policy.Reporting of risk measures should be doneregularly and should clearly comparecurrent exposure to policy limits. Inaddition, past forecasts or risk estimatesshould be compared with actual results toidentify any modeling shortcomings.Reports detailing the market riskexposure of the FI should be reviewed bythe board on a regular basis. While thetypes of reports prepared for the board andfor various levels of management will varybased on the FI’s market risk profile, theyshould at a minimum include thefollowing:1. Summaries of the FI’s aggregateexposures;2. Reports demonstrating the FI’scompliance with policies and limits;3. Summary of key assumptions, forexample, non-maturity deposit behavior,prepayment information, and correlationassumptions;4. Results of stress tests, includingthose assessing breakdowns in keyassumptions and parameters; and5. Summaries of the findings ofreviews of market risk policies,procedures, and the adequacy of themarket risk measurement systems,including any findings of internal andexternal auditors and retained consultants.D. Risk controls and auditAdequate internal controls ensure theintegrity of an FI’s market riskmanagement process. These internalcontrols should be an integral part of theinstitution’s overall system of internalcontrol and should promote effective andefficient operations, reliable financial andregulatory reporting, and compliance withrelevant laws, regulations, and institutionalpolicies. An effective system of internalcontrol for market risk includes:1. A strong control environment;2. An adequate process foridentifying and evaluating risk;3. The establishment of controlactivities such as policies, procedures, andmethodologies;4. Adequate information systems;5. Continual review of adherence toestablished policies and procedures; and6. An effective internal audit andindependent validation process.Q RegulationsAppendix Q-43 - Page 14Manual of Regulations for Non-Bank Financial Institutions