Monetary Authority of Singapore Risk Management Guidelines on Market Risk – Overview and Summary of Requirements

• By: Staff Editor
• Date: March 08, 2013

• Each institution must establish a well informed strategy to deal with market risk.
• The strategy must first determine the level of market risks that the institution can handle.
• Tolerance to market risks must inform the institution’s risk management  – one that is capable of balancing its appetite for market risks with its business targets.
• Following are the risk factors to be considered when setting market strategy:
  • Economic and market conditions
  • Institution’s expertise in profiting in specific markets
  • Institution’s ability to identify, monitor and control market risks in these markets
  • Institution’s portfolio mix and how this may be affected by market risk
• Review of the market risk strategy of the institution must be periodically reviewed by Board members, senior management. Relevant staff must be aware of current market risks.

• Each institution must formulate and implement Board-approved policies for market risks which should be indicative of the institution’s strategy, including the managing and controlling approach to market risk.
• The application of policies must occur on a consolidated basis and, where necessary, to particular affiliates, units or subsidiaries within the framework of an institution.
• Policies should do the following:
  • Detail how market risk is measured
  • Describe how market risk is to be communicated to the Board
  • Detail how Board should decide the maximum market risk that the institution can take on
  • Clearly differentiate between the lines of authority and responsibilities of Board, senior management and other employees responsible for market risk management
  • Set out scope of activities of units assuming market risk
  • Identify and implement guidelines on market risk control structure, delegation of authority, capital requirements, investigation of disputed transactions and so on.

• Necessary processes and procedures must be set up within an institution to implement market risk policy and strategy.
• These processes should be clearly documented in a manual made available to all employees who have to carry them out.
• The procedures must cover all activities exposed to market risks.

• Institutions should have a robust risk management process that comprise, among other things:
  • Risk identification framework
  • Detailed structure of risk limits
  • Market risk taking guidelines
  • Management Information System or MIS for controlling, monitoring and reporting market risk
  • Accounting policies for treating market risk
• The market risk management process must be incorporated to the fullest extent possible into the institution’s overall risk management system.
• The risk management system must take into consideration the size, scope and complexity of the trading and other financial activities of the institution
• The risk management system should quantify risk exposures and monitor changes in market risk factors
• The institution must establish market risk limits that remain consistent with the final exposure level which has got authorization from the senior management and Board.
• The treasury and financial derivative valuation processes must be robust and independent of the trading function
• Deal slips must show if a transaction is for hedging purposes and give details of the hedge if so.
• There should be a unit within an institution dedicated to management of structural market risks
• Board and senior management should establish effective processes to manage market liquidity risk arising from treasury and financial derivative trading activities
• Investment decision-making framework, risk monitoring, control and reporting should all be properly documented

• All institutions must incorporate the necessary market risk measures into their framework.
• The monitoring of these risks should be incorporated into the risk management system
• Market risk estimation models should be based on accepted financial concepts and risk management techniques
• The result of the internal models can be used as the dominant market risk measure. 

• Risk limits of business units should be approved by the Board and senior management and periodically reviewed
• Risk limit compliance should be monitored by a unit independent of risk-taking activities

• Periodic stress tests and scenario analysis should be a part of the process of market risk management.
• These tests and analyses should be, as far as possible, carried out on an institution-wide basis.
• Board and management should regularly review the results of stress tests and analyses, including the major assumptions on which they are based

• If an institution avails an investment manager’s services (internal and external), they should be under constant monitoring to make sure they stick to the strategy of the institution.
• If investment management is outsourced to a third party, Board and senior management should ensure that suitable controls are in place
• Investment managers’ reporting should be sufficient to allow an assessment of whether their operations comply with the institution’s market risk management strategy
• A clear investment mandate, setting out parameters within with the investment manager should operate, must be formulated and implemented
• The capitalization and financial standing of an investment manager must be assessed if he/she holds an institution’s funds or is a counterparty to certain investment transactions

 Additional Resources

Read the MAS Risk Management Guidelines on Market Risk in full.