Annual Report 2011 - Hong Kong Monetary Authority

- The Risk Manager sees to it that the risk management
guidelines and methods are incorporated in decisionmaking
and operational processes. He monitors risk
exposure and compliance with the relevant limits, and
reports on risk status to the Bank/Group. Each Group
entity has a Risk Control and Management section that
reports regularly to the Risk Manager of the Bank.
Interest rate and liquidity risks
The liquidity risk is the risk that the Group might not be able
to meet its present and future cash flow and collateral requirements,
whether expected or unexpected, without harming its
daily operations or financial situation. The interest rate risk
resides in the vulnerability of the Group’s net worth or net interest
margin to an adverse movement in market interest rates.
It is not the Bank’s or the Group’s objective to take advantage
of our ability to change due dates or to expose ourselves
to the liquidity risk. We take a prudent approach to
cash management by choosing short maturities and firstclass
counterparties. Our emphasis is on safeguarding our
commitments to clients, in normal and stress situations
alike. We moreover seek to match resources to their use
both short and long term.
The risks attaching to liquidity and to interest rate positions/
maturities are gauged by using the most up-to-date balance
sheet management techniques and by tracking these
items with dedicated software. An Asset and Liability Management
Committee drafts and oversees the implementation
of rules on managing liquidity, interest rate and forex
risks. It is also responsible for optimising cash management
and ensuring structural control of the balance sheet.
Counterparty risk
This is the risk that a client or counterparty bank might not
be able to honour an obligation towards the Group.
Counterparty banks
The counterparty banks that the Group deals with are
selected rigorously and kept under close scrutiny. Our
exposure to them is monitored continuously by a team of
controllers, and the limits that we have granted to each are
updated periodically or in real time if so required by a deteriorating
situation. To minimise the counterparty risk attaching
to correspondent banks, we give preference to reverse
repo agreements and to depositing cash directly with central
banks. All the Group entities use the limits system and
monitor the risk of counterparty concentration.
Clients
The credit facilities that we grant to clients are mainly shortterm
advances secured by their investments and, less
frequently, loans in connection with their business activities.
Applications for these facilities are subject to stringent
analysis, and the pledged securities are assigned a collateral
ratio according to their liquidity, valuation, credit rating
and diversification in terms of asset class and geographical
spread. Daily monitoring of the client credit risk is handled
by a special team that also administers the loans.
Market risk
This lies in the vulnerability of the Group’s financial situation
to adverse swings in market prices and especially in the
underlying value and implied volatility of currencies, equities,
precious metals and commodities.
Securities dealing on a propriety basis forms a very small
part of the Group’s business. In currencies and precious
metals we chiefly operate on behalf of clients and build only
small nostro positions. The limits granted to traders are low,
and their use of these is monitored constantly with software
by separate risk management and internal control services.
Operational risk
This is the risk of loss that the Group would suffer owing
to the inadequacy or failure of internal procedures, staff, IT
systems or external occurrences.
The Group entities have adopted a policy aimed at monitoring
and mitigating the following operational risks inherent in
wealth management:
- internal and external fraud
- negligence regarding confidentiality and/or banking secrecy
protection requirements
FINANCIAL REPORT CONSOLIDATED ACCOUNTS 75