Post on 29-May-2018
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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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