Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries

c) detail requirements for the evaluation and approval of new productsor activities. (This requires the board to approve the definition ofwhat is meant by a "new" product, e.g. a change in the underlyinginstrument and hence in the risk, or a change in the capacity inwhich the institution trades the product, e.g. as dealer or end-user);d) provide for sufficient staff resources and other resources to enablethe approved derivatives activities to be conducted in a prudentmanner;e) ensure appropriate structure and staffing for the key risk controlfunctions, including internal audit;f) establish management responsibilities;g) identify the various types of risk faced by the institution and establisha clear and comprehensive set of limits to control these;h) establish risk measurement methodologies which are consistent withthe nature and scale of the derivatives activities;i) require stress testing of positions; andj) detail the type and frequency of reports which are to be made tothe board (or committees of the board).14. The type of reports to be received by the board should include thosewhich indicate the levels of risk being undertaken by the institution, thedegree of compliance with policies, procedures and limits, and the financialperformance of the various derivatives and trading activities. Internaland external audit reports should be reviewed by a board level AuditCommittee and significant issues of concern should be drawn to theattention of the board. More detailed information should be suppliedto senior management, including that which splits risk exposure, positionsand profitability by regions, business units and products and which analysesexposure to the various market variables (interest rates, exchange ratesetc.).Guideline on Risk Management of Derivatives and Other Traded Instruments