RBS 2013 Annual Report Download - page 323
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Business review Risk and balance sheet management
321
Governance structure
For general information on risk governance in the Group, see the Risk
governance section on pages 176.
The Group Chief Risk Officer (CRO) delegates responsibility for day-to-
day control of market risk to the traded and non-traded market risk
functions. Responsibility for controlling market risk in divisions is
delegated to divisional market risk functions, the heads of which are
accountable to divisional CROs, who in turn are accountable to the Group
CRO.
Risk management
Frameworks and processes common to both traded and non-traded
market risk management are described in this sub-section. Separate sub-
sections on traded and non-traded market risk follow, which provide more
detailed information specific to the management and measurement of
these two risk types.
Risk appetite and limit framework*
Market risk appetite is the level of market risk that the Group accepts
when pursuing its business objectives, taking into account both projected
and stressed scenarios. The Group has a comprehensive structure and
controls in place aimed at ensuring that this appetite is not exceeded.
The Group’s qualitative market risk appetite is set out in policy
statements. These define the governance, responsibilities, control
framework and requirements for the identification, measurement,
analysis, management and reporting of market risk arising from the
Group’s trading and non-trading activities. These policies are also
cascaded, as appropriate, to the Group’s legal entities, divisions and
businesses to ensure there is a consistent control framework throughout.
Group market risk limits that express its market risk appetite in
quantitative terms for trading and non-trading activities are proposed by,
respectively, the heads of traded and non-traded market risk. Once
approved by the ERF, these limits establish a set of comprehensive
boundaries within which business activities are conducted and monitored.
The heads of traded and non-traded market risk cascade the Group
market risk limits down to the legal entities and divisions. The divisional
market risk functions are responsible for cascading legal entity and
divisional market risk limits to lower levels as appropriate.
The limit framework comprises not only Group limits but also legal entity,
divisional and lower level limits and aims to capture all material market
risks arising from the Group’s activities.
The limit framework at the Group level comprises Value at Risk (VaR),
Stressed Value at Risk (SVaR), sensitivity and stress limits (for more
details on VaR and SVaR, see pages 323 and 328). The limit framework
at the divisional, legal entity and lower levels also comprises additional
metrics that are specific to the market risk exposures within its scope.
These additional metrics aim to control various risk dimensions such as
product type, exposure size, aged inventory, currency and tenor.
The limits are reviewed to reflect changes in risk appetite, business
plans, portfolio composition and the market and economic environments.
*unaudited
Limit breaches at the Group level require escalation by the head of traded
market risk or the head of non-traded market risk, as appropriate, to the
ERF and the Group CRO. Limit breaches at the divisional or legal entity
level require escalation by the head of the relevant divisional market risk
function to the head of traded market risk or the head of non-traded
market risk, as appropriate.
Valuation and independent price verification
Traders are responsible for marking-to-market their trading book
positions daily, ensuring that assets and liabilities in the trading book are
measured at their fair value. Any profits or losses on the revaluation of
positions are recognised daily.
Business unit controllers are responsible for ensuring that independent
price verification processes are in place covering all trading book
positions held by their business. Independent price verification is the key
control over front office marking of positions.
For more information on valuation controls, refer to page 412. The
validation of pricing models is discussed below.
Model validation
This sub-section discusses the independent model validation framework
governing both pricing models and risk models (including Value-at-Risk).
The Group uses a variety of models to manage and measure market risk,
as described below. These models comprise pricing models (used for
valuation of positions) and risk models (for risk measurement and capital
calculation purposes). They are developed in both divisional units and
Group functions and are subject to independent review and sign-off.
The Group has a dedicated independent model review and challenge
function - Group Risk Analytics (GRA) - which performs reviews of
relevant models in two instances: (i) for new models or amendments to
existing models and (ii) as part of its ongoing programme to assess the
performance of these models.
A new model is typically introduced when an existing model is no longer
fit for purpose or a new product requires a new methodology or model to
quantify the risk appropriately. Amendments are usually made when a
weakness is identified during use of a model or following analysis either
by the model developers in the divisions or by GRA.
GRA also reassesses the appropriateness of approved models following
significant market or regulatory developments or portfolio changes. The
mechanics of the review process are the same as those for new models.
Pricing models*
Pricing models are developed by a dedicated front office team, in
conjunction with the trading desk. They are used for the valuation of
positions for which prices are not directly observable and for the risk
management of the portfolio.
Any pricing models that are used as the basis for valuing books and
records are subject to approval and oversight by asset-level modelled
product review committees.