Risk Management Framework- presentation

8/8/2019 Risk Management Framework- presentation

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MUHAMMAD ATIF


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Objectives of presentation includes to

develop your understanding about:

What is Reserve Management

Objectives and transparency

Risk Governance

Risk in Reserve Management

Risk Management practices of RBA

Risk Management practices of BCRP(Peru)

Recommendations


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Reserve Management

Definition

Reserve management is a process that ensures thatadequate official public sector foreign assets are readily

available and controlled by the authorities for meeting a

defined range of objectives for a country.


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Cont..

Objectives Foreign exchange reserves are available for

meeting a defined range of objectives.

Market, exchange rate and credit risks are

controlled in a prudent manner.

Reasonable earnings are generated over the

medium to long term on the funds invested. Assist the Govt. in meeting foreign exchange

needs and external debt obligations.


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Cont..Scope

Management of liabilities

Short foreign exchange positions

The use of derivative financial instruments.

Transparency and Accountability

Clarity of roles, responsibilities, and objectives of financialagencies responsible for reserve management

Open process for reserve management market operations

Public availability of information on foreign exchange reserves Accountability and assurances of integrity by agencies

responsible for reserve management


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Governance

Describes the overall management approach through whichsenior executives direct and control the entire organization,

using a combination of management information and

hierarchical management control structures.

Internal Governance Structure Guidelines


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Risk

Probability or threat of a damage,injury,loss or negative

occurance

caused by external or internal vulnerabilities

Risk framework

A Model of risks in the organization. Risk frameworks typically

enumerate the various classes of risk and the degree of Risk that

Management expected.

Risk Management Frameworko Identifies and assesses the risks of reserve management operations

o Allows the risks within acceptable parameters


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Risk in ReserveManagement

EXTE

RNAL MARKET-

BASED

RI

SKS:Liquidity risk.

Credit risk

Exchange rate risk

OPERATIONAL RISKS

Control system failure risks

Financial error risk

Loss of potential income


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Reserve Bank of Australia

United States Europe Japan

Currency allocation (%) 45 45 10

Asset allocation (%) 45 45 10

Duration (Months) 30 30 30

United States Europe Japan

Asset Class % of Total Asset Class % of Total Asset Class % of Total

Deposits 22 Deposits 30 Deposits 22

Treasury bills 21 Treasury bills 15 Treasury bills 33

Treasury

otes 57

onds 55

onds 45


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Weaknesses in system

No llowanc of ric volatility and corr lation in ric ov nts tween

sec rities and etween ortfolios.

Ineffective ack arrangement intheeventof contingency and fail retoreventexcessive risk taking.

Thesemeas res does notmeas rethe risk thatthe iss er of sec rity candefaultatthematurity

RBA focus on VaR andDaR that is morenarrow focus onmeasuringthemarket risk of ortfolioex osures.

Fundmanagers areallowedtodeviate fromtargetthat is a arrier tomea

su

re

and

in

co

ro

rate

the

se

risks in

lim

it


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Strengths in the system

There is a latitude for managers to invest and deviate frombenchmark.

Use of benchmark and separation of duties of back, middle andfront offices

The reserve management hierarchy is responsible for defining theobjectives and responsibility of implementing the mandate

All the policies are clearly understood by staff and control system,

and the investment mandate is documented

Any needed change requires management approval before thechange is made


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CENTRALRESERVE BANKOF

PERU(BCRP)

Currencies Jun-30-

2010

Term to maturity Jun-30-

2010

Long term rating Jun-30-

2010

US$ 82.2

Other currencies

Gold

82.2

15.7

2.1

0-3 Months

3-12 Months


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Strengths The BCRPs reserve management involves a risk

neutral and replicable portfolio even when the marketis very volatile.Its portfolio is based on the marketindicies

The purpose is to maximize the return on investmentand latitude also given to the fund managers.Actual and

banchmark portfolio is monitored on the daily basis atmarket prices

The BCRP has managed its liquidity risk by diversifying indifferent investments.Deposits are held with first class

banks that are assigned A-1 and A+ credit rating.

The BCRP manage their interest rate risk by matching theterm structure of assets and liabilities.Most of theirinvestments are in AAA securities.


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Weaknesses in system

Most of BCRPs assets andexternal debts are dollardenominated that poses the

great exchange risk ifUSD losesits value.

Their investment in long term

income funds that has higherinterest rate but it could affectthe value of asset


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Recommendations for effective risk management in

reserves

Decision making authority for reservemanagement clearly defined, Authority shoulddevelop the objectives of reservemanagement.

A strategic long term portfolio that is besttrade off between different risk

A latitude for the fund managers to deviatefrom benchmark as provided by RBA and

BCRPIf SBP dont want to do so then it can transferthe authority to the treasurer to assign extralimit to fund managers if they can provide the

solid reason to invest.


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Cont..

If fund managers are allowed to deviate their performance and

accountability can be measured through comparison of actualand benchmark portfolio and it should be reviewed regularly.

The risk management should apply the same principles toexternal and internally managed funds and careful selection ofreputable external managers that is a task of middle office.

Establish a separate unit or assign a position within the middleoffice to monitor the activities of external managers.

Risk exposures should be monitored regularly to determine thatit could not be extended beyond acceptable limit with eitherdeviation.


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Cont.. Fund managers should be aware of potential

losses and other consequence of risk exposuresso they could be prepared to accept the results.

The eligibility criteria for the selection of

trading counterparties should be clearlydefined.

There should be a framework for determiningthe maximum credit exposure permitted with

each party. Active risk management is good approach to

mitigate the risk than passive risk managementpractices.


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Documents

Risk Management Framework- presentation