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

  • By: Staff Editor
  • Date: March 08, 2013
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The Monetary Authority of Singapore (MAS) published these Risk Management Guidelines on Market Risk in February 2006. They are aimed at helping financial institutions better cope with the risks inherent in market exposure. This article provides an overview and summary of requirements included in the guidelines.
What is market risk?
Risks to an institutions arising from changes in market prices, especially shifts in interest rates, commodity and equity prices, and foreign exchange rates are known as market risks. Market risks often stem from other financial risk forms like market and credit-liquidity risks. Institutions must adopt suitable market risk management techniques to deal with exposures to market risks.
Risk Management Procedures and Policies
The MAS Guidelines recommend the following:
Strategy for Risk Management:
  • 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.
Institutions must have process to detect deviations from approved market risk strategy and target markets.
Risk Management Policies
  • 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.
Procedures for Risk Management
  • 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.
Risk Monitoring, Measurement and Controls
Processes and Systems
  • 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
Measurement of Risks
  • 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
  • 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
Scenario Analysis and Stress Testing
  • 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
Use of Investment Managers
  • 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.


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