MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4308.12.31Policies and procedures should specifythe approval processes, exposure limits,reconciliations, reviews, and other controlmechanisms designed to provide areasonable assurance that the institution’smarket risk management objectives areachieved. Many attributes of a sound riskmanagement process, including riskmeasurement, monitoring, and controlfunctions, are actually key aspects of aneffective system of internal control. FIsshould ensure that all aspects of the internalcontrol system are effective, includingthose aspects that are not directly part ofthe risk management process.An important element of an FI’sinternal control system is regularevaluation and review. The BSP expectsthat FIs will establish a process to ensurethat its personnel are following establishedpolicies and procedures, and that itsprocedures are actually accomplishingtheir intended objectives. Such reviewsand evaluations should also address anysignificant change that may impact theeffectiveness of controls, and thatappropriate follow-up action wasimplemented when limits were breached.Management should ensure that all suchreviews and evaluations are conductedregularly by individuals who areindependent of the function they areassigned to review. When revisions orenhancements to internal controls arewarranted, there should be a mechanismin place to ensure that these areimplemented in a timely manner.Independent reviews of the marketrisk measurement system should alsoinclude assessments of the assumptions,parameters, and methodologies used.Such reviews should seek to understand,test, and document the currentmeasurement process, evaluate thesystem’s accuracy, and recommendsolutions to any identified weaknesses. Ifthe measurement system incorporates oneor more subsidiary systems or processes,the review should include testing aimedat ensuring that the subsidiary systems arewell-integrated and consistent with eachother in all critical respects. The results ofthis review, along with anyrecommendations for improvement,should be reported to senior managementand/or the board.The BSP expects that FIs withcomplex risk exposures should have theirmeasurement, monitoring, and controlfunctions reviewed on a regular basis byan independent party (such as an internalor external auditor). In such cases, reportswritten by external auditors or otheroutside parties should be available to theBSP. It is essential that any independentreviewer ensures that the FI’s riskmeasurement system is sufficient tocapture all material elements of marketrisk, whether arising from on- or offbalance-sheetactivities. Among the itemsthat an audit should review and validateare:1. The appropriateness of the FI’s riskmeasurement system(s) given the nature,scope, and complexity of its activities.2. The accuracy and completeness ofthe data inputs - This includes verifying thatbalances and contractual terms arecorrectly specified and that all majorinstruments, portfolios, and business unitsare captured in the model. The reviewshould also investigate whether dataextracts and model inputs have beenreconciled with transactions and generalledger systems. 13. The reasonableness and validity ofscenarios and assumptions – This includesa review of the appropriateness of the1It is acceptable for parts of the reconciliation to be automated; e.g., routines may be programmed to investigate whetherthe balances being extracted from various transaction systems match the balances recorded on the FI’s general ledger.Similarly, the model itself often contains various audit checks to ensure, for example, that maturing balances do notexceed original balances.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 15