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Market Risk Management

Market Risk Management. Jan Sijbrand Chief Risk Officer WCS. 12 November 2001. Market Risk Management at ABN AMRO. Organisation / Control Value at Risk and beyond Risk and reward. Organisational Structure. Managing Board. Legal Audit Finance Personnel Risk. Corporate Centre.

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Market Risk Management

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  1. Market Risk Management Jan Sijbrand Chief Risk Officer WCS 12 November 2001

  2. Market Risk Management Market Risk Management at ABN AMRO • Organisation / Control • Value at Risk and beyond • Risk and reward

  3. Market Risk Management Organisational Structure Managing Board • Legal • Audit • Finance • Personnel • Risk Corporate Centre Commercial & Consumer Segment Wholesale Client Segment Private Clients / Asset Management • Retail • SME Product Business Lines Client Business Lines Chief Risk Officer

  4. Group CFO / CRO T. de Swaan Chairman Wholesale Client Segment W. Jiskoot Chief Risk Officer WCS J. Sijbrand Special Credits Credit TMT Credit ACD Credit ECP Credit FI/PS Market Risk Control Product Analysis Legal Audit Market Risk Management Organisational Structure

  5. Market Risk Management Organisational Structure Market Risk Control Market Risk Reporting Product Line Risk Managers Local Risk Managers

  6. Market Risk Management Market Risk Management • Independent risk management function in Wholesale • Market risk control: risk officers on the floors • Product analysis: approval of new financial instruments

  7. Market Risk Management IIValue at Risk and beyond Methods, systems and procedures • Value at Risk (VatR) • Scenario tests • Greeks and stress tests

  8. Market Risk Management Global VatR breakdown by product line as of 28 September 2001 • Total VatR (group-wide) : EUR 40.9 mln • Sum of VatR at desk level: EUR 149 mln

  9. Market Risk Management How useful is Value at Risk? • VatR: once in a 100 days we may lose more than this amount (i.e. 1.65 daily standard deviations) • VatR is a useful concept to see how market risk is distributed over the bank • VatR on its own is not sufficient as a risk control instrument

  10. Market Risk Management Not only Value at Risk but also scenario’s • Black Monday (18 - 20 Oct. ‘87) • Bond crash (18 - 21 Feb. ‘94) • Emerging market crisis (24 - 28 Oct. ‘97) • Financial market crisis (Jul. - Oct. ‘98) • Czech scenario (May ‘97)

  11. Market Risk Management Not only Value at Risk but also scenario’s Example:Black Monday scenario as run on 11 September: • Equity: - EUR 115 mln • Fixed Income: + EUR 248 mln Compared with September 10 - 21 actual results: • Equity - EUR 13 mln • Fixed Income + EUR 90 mln • Under Black Monday scenario ABN AMRO stood to gain EUR 133 mln on these trading portfolios In reality Sept. 10 - 21 ABN AMRO earned EUR 77 mln on the portfolios

  12. Market Risk Management The detail of day to day life in the dealingroom: “Greeks” • PVBP limits per bucket • Credit spread PVBP’s • Delta • Gamma • Vega • Stress tests (underlying / volatility) • Long / short / net on securities • Correlation limits • Discontinuity limits

  13. Market Risk Management Counter liquidity risk in security markets • Limits per issuer (depending on rating) • Balance sheet limits • Percentage of open interest • Percentage of daily turnover • Collateral concentration limits

  14. Market Risk Management Limit structure • Over 24,000 limits, covering the following areas: Delta, gamma, vega Basis risks Notional amounts Products Traded Concentration / Liquidity VatR Stress tests / curvature Correlation, discontinuity Scenarios

  15. Market Risk Management The coherence of VatR and “Greeks” 20 VatR limits ALCO Group Risk Committee 600 VatR, scenario and “Greek” limits 24,000 detailed “Greek” limits 7 Risk Management Committees 3,000 dealers in 114 dealing rooms

  16. Market Risk Management Limits and exposures • Limits set in top - down process • Daily control of all risks against their limits • Daily reporting and aggregation at higher level

  17. Market Risk Management Limits and exposures ALCO Limits (irregular in time, at least annually) Exposures (daily) GRC RMC’s traders back office

  18. Market Risk Management Market risk systems overview Global Risk Report Market Risk Core Systems Treasury Branches North/Latin America Risk Big Bob Asia Risk Management AMLO Treasury & Fixed Income European Equities & Equity Derivatives Bob Varax RIMS Ronnie 2 ……….. ……….. Infinity Bloomberg OMR

  19. Market Risk Management ABN AMRO market risk principles • Simple products, larger limits • Complex products, lower limits • Limits are an instrument of delegation; excesses are possible provided agreed up front • Escalation of any excesses from RMC GRC ALCO

  20. Market Risk Management Trading of new exotic products • A solid model is developed by Front Office/Product development • Tested by an independent Product Analysis Group • Implemented in system (to calculate prices, hedge ratios, contribution to VatR) • Tested again by Product Analysis Group

  21. Market Risk Management Approval by Product Group involves 14 steps, among which testing • Correctness of mathematical model • Calibration of model to market data • Statistical/mathematical study of model correctness • Historical hedge performance • Description of risk factors • Model applicability Approval often only comes with model reserves. These are reserves around model prices that are not taken in the P&L

  22. Market Risk Management III Risk and reward

  23. Market Risk Management VatR utilisation in 2001

  24. Market Risk Management Total VatR Utilisation Building up FI positions in anticipation of Fed. rate cuts. Increasing FI positions especially by prop. traders.

  25. Market Risk Management Risk and reward • Backtests: comparison of • Profit & Lossversus • Value at Risk • Actual backtests • Full back office P&L (incl. fees, commissions, intra-day trading)versus • Value at Risk • Hypothetical backtests • P&L due to just market movementversus • Value at Risk

  26. Market Risk Management Backtesting results Actual P&L versus Value at Risk 1 January - 31 December 2000

  27. Market Risk Management Backtesting results Hypothetical P&L versus Value at Risk 1 January - 31 December 2000

  28. Market Risk Management Backtesting results Actual P&L versus Value at Risk September 2001

  29. Market Risk Management Backtesting results Hypothetical P&L versus Value at Risk September 2001

  30. Market Risk Management Risk and reward • Conservatism in ABN AMRO’s Value at Risk • in some cases add-ons for basis risk • credit spread risk added on to general risk As a consequence: never a VatR breach at aggregate group level

  31. Market Risk Management Daily P&L distribution

  32. Market Risk Management Risk and reward Standard deviation of daily P&L distribution is a better measure of risk than (conservative) Value at Risk number

  33. Market Risk Management Asset & Liability Management

  34. Market Risk Management Net interest income of ABN AMRO • Net interest income per currency

  35. Market Risk Management ALM in the SBU-organisation

  36. Market Risk Management Group ALM responsibilities • Governance / policy setting • Interest rate risk • Liquidity risk • Capital management • Profit centre tasks • Funding and capital management structure • Currency risk hedging of capital • Overlay portfolio’s for Group interest positions

  37. Market Risk Management Interest rate scenarios • ABN AMRO uses interest rate scenarios like • yield curve shifts • yield curve twists • Input to calculate the impact on • interest income earned • fair value of equity Self-imposed corporate limit reflects a moderate risk appetite in this area

  38. Market Risk Management Euro interest position

  39. Market Risk Management Projections net interest income- Scenarios -

  40. Market Risk Management Projections net interest income- Euro interest position -

  41. Market Risk Management Currency hedging strategy • Strategy / policy • Group ALCO (USD and BRL) • Group Risk Committee (other currencies) • Group Asset & Liability Management: • gives advise to Group ALCO / Group Risk Committee • manages pro-actively and selectively the different currency positions within the approved strategy / policy • Hedges • capital hedges • profit hedges • ratios hedge

  42. Market Risk Management Currency hedging strategy • Capital hedging transactions are limited to existing exposure in currencies and are selectively (cost-benefit analysis) applied • Ratio hedging transactions are aiming at keeping a constant BIS ratio hedged against possible currency fluctuations. • Profit hedges are used to protect profit against expected currency fluctuations.

  43. Market Risk Management

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