RBS 2013 Annual Report Download - page 324
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Business review Risk and balance sheet management
322
Market risk continued
Risk management continued
These committees comprise representatives of the major stakeholders in
the valuation process - trading, finance, market risk, model development
and model review functions.
The review process comprises the following steps:
• The committees prioritise models for GRA review, considering the
materiality of the risk booked against the model and an assessment
of the degree of model risk, that is the valuation uncertainty arising
from the choice of modelling assumptions.
• GRA quantifies the model risk by comparing front office model
outputs with those of alternative models independently developed by
GRA.
• The sensitivities derived from the pricing models are validated.
• The conclusions of the review are used by Market Risk to inform risk
limits and by Finance to inform model reserves.
Risk models*
All new risk models are subject to GRA review and sign-off.
All model changes are approved through model governance at the
divisional level. Changes to existing models that have an impact on VaR
exceeding 5% at legal entity level or 15% at a major business level are
also subject to GRA review and sign-off as are all model changes that
require regulator approval before implementation.
The traded market risk team in Markets also performs regular VaR model
testing, which is discussed in more detail under Risk measurement -
Value at Risk on page 323.
GRA’s independent review comprises some or all of the following steps,
as appropriate:
• Testing and challenging the logical and conceptual soundness of the
methodology;
• Testing the assumptions underlying the model, where feasible,
against actual behaviour. In its validation report, GRA will opine on
the reasonableness and stability of the assumptions and specify
which assumptions, if any, should be routinely monitored in
production;
• Testing whether all key market risks have been sufficiently captured;
• Re-applying the Group's proposed approach to verify that the same
outcome is achieved;
• Comparing outputs with results from alternative methods;
• Testing parameter selection and calibration;
*unaudited
• Ensuring model outputs are sufficiently conservative in areas where
there is significant model uncertainty;
• Confirming the applicability of tests for accuracy and stability;
recalculating and ensuring that results are robust; and
• Ensuring appropriate sensitivity analysis has been performed and
documented.
Based on the review and findings from GRA, an internal model
governance committee with appropriate delegated authority considers
whether a model can be approved for use and whether any conditions
need to be imposed, including those relating to the remediation of
material issues raised through the review process. Once approved
through internal governance, the new or amended model is implemented.
Models used for regulatory reporting may additionally require PRA
approval before implementation.
GRA also reassesses the appropriateness of approved risk models
annually.
Traded market risk
Risk management
The governance framework, risk management principles and appetite
and limit framework applicable to the Group’s management of market risk
are covered by the discussion on page 176. More specific information on
the Group’s management of traded market risk is provided below.
Identification and assessment
Identification and assessment of traded market risk is achieved through
gathering, analysing, monitoring and reporting market risk information by
business line or at a consolidated level. Industry expertise, continued
system developments and techniques such as stress testing are also
used to enhance the effectiveness of the identification of all material
market risks.
This is complemented by the Group’s New Product Risk Assessment
process, which requires market risk teams to assess and quantify market
risk associated with all proposed new products.
Reporting and monitoring
The Group’s traded market risk exposures are monitored against limits
and analysed daily by market risk reporting and control functions. A daily
report that summarises the Group’s market risk exposures against the
limits set by the ERF is sent to the Group CRO, divisional CROs and
market risk managers across the divisions.
Divisional market risk functions also prepare daily risk reports that detail
exposures against a more granular set of limits and triggers.
Limit reporting is supplemented with regulatory capital and stress testing
information as well as ad hoc reporting.
Finally, a market risk update is included in the monthly risk management
report sent to Group Board. The update covers the key risks and trends,
together with a discussion of relevant issues and market topics.