RBS 2012 Annual Report Download - page 245

RBS GROUP 2012
243
Market risk
Introduction
Market risk arises from fluctuations in interest rates, foreign currency,
credit spreads, equity prices, commodity prices and risk related factors
such as market volatilities. The Group manages market risk within its
trading and non-trading portfolios through a comprehensive market risk
management framework. This control framework includes qualitative and
quantitative guidance in the form of comprehensive policy statements,
dealing authorities, limits based on, but not limited to, value-at-risk (VaR),
stressed VaR (SVaR), stress testing and sensitivity analyses.
Governance
Business structure
The primary focus of the Group’s trading activities is to provide an
extensive range of financing, risk management and investment services
to its customers, including major corporations and financial institutions
around the world. The Group undertakes these activities organised within
the principal business lines: money markets; rates flow trading;
currencies and commodities; equities; credit markets; and portfolio
management and origination.
Financial instruments held in the Group’s trading portfolios include, but
are not limited to: debt securities; loans; deposits; equities; securities sale
and repurchase agreements and derivative financial instruments.
The Group undertakes transactions in financial instruments that are
traded or cleared on an exchange, including interest rate swaps, futures
and options. Holders of exchange traded instruments provide margin on a
daily basis with cash or other security at the exchange.
The Group also undertakes transactions in financial instruments that are
traded over-the-counter rather than on a recognised exchange. These
instruments range from commoditised transactions in derivative markets,
to trades where the specific terms are tailored to meet customer
requirements.
In 2011, RBS Group announced plans to transfer a substantial part of its
business from RBS N.V. to RBS plc, in an effort to simplify the structure
and reduce risk. During 2012, a substantial part of the business was
transferred to RBS plc. A key element of this was the Financial Services
Authority (FSA) approval of the Netherlands trading branch location into
the scope of the regulatory models.
Organisation structure
Independent oversight and support is provided to the divisions by the
Global Head of Market & Insurance Risk, assisted by the Group and
divisional market risk teams. The head of each division, assisted by a
divisional market risk management team, is accountable for all market
risks associated with its activities. The Global Market Risk Committee
reviews and makes recommendations concerning the market risk profile
across the Group, including risk appetite, risk policy, models,
methodology and market risk development issues. The committee meets
quarterly and is chaired by the Global Head of Market & Insurance Risk.
Attendees include respective divisional market risk managers and Group
Market Risk.
Regulatory Risk
Trading activities will indirectly be impacted by regulatory proposals that
will change market participants behaviours. These are discussed in more
detail in the Regulatory risk section (refer to page 285). Developments
specific to market risk include the Fundamental Review of the Trading
Book (FRTB) and the Fundamental Review of the Securitisation
Treatments. The FRTB remains at a conceptual stage and there is
currently insufficient practical detail available to provide a meaningful
assessment of what may eventually be implemented. The Basel
Committee's review of the treatment of securitisation positions is further
advanced and the Group is currently reviewing how it can participate to
assess the impact on trading book activities.
Risk measurement
Key principles
The Group’s qualitative market risk appetite is set out in policy
statements, which outline the governance, responsibilities and
requirements surrounding the identification, measurement, analysis,
management and communication of market risk arising from the trading
and non-trading investment activities of the Group. All teams involved in
the management and control of market risk are required to fully comply
with the policy statements to ensure the Group is not exposed to market
risk beyond the qualitative and quantitative risk appetite. The control
framework covers the following principles:
x Clearly defined responsibilities and authorities for the primary
groups involved in market risk management in the Group;
x An independent market risk management process;
x Daily monitoring, analysis and reporting of market risk exposures
against market risk limits;
x Clearly defined limit structure and escalation process in the event of
a market risk limit excess;
x A market risk measurement methodology that captures correlation
effects and allows aggregation of market risk across risk types,
markets and business lines;
x Use of VaR as a measure of the one-day and SVaR as a measure
of the ten-day market risk exposure of all trading positions;
x Use of non-VaR based limits and other controls;
x Use of stress testing and scenario analysis to support the market
risk measurement and risk management process by assessing how
portfolios and global business lines perform under extreme market
conditions;
x Use of back-testing as a diagnostic tool to assess the accuracy of
the VaR model and other risk management techniques;
x Adherence to the risks not in VaR framework to identify, quantify
and capitalise risks not captured within the VaR model; and
x A product approval process that requires market risk teams to
assess and quantify market risk associated with proposed new
products.
Business review Risk and balance sheet management continued