Comprehensive Overview of Market Risk Management Framework in Financial Institutions
Explore the detailed presentation from the MEFMI seminar on Market Risk in September 2017, covering topics like Risk Management Framework, Investment Policy and Objectives, Reserves Structure, Portfolio Managers, Market Risk, and Currency Risk Management strategies.
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Presentation Transcript
PRESENTATION FOR MEFMI SERMINAR ON MARKET RISK September 2017
RISK MANAGEMENT FRAMEWORK Board Investment Committee (Chaired by Governor) Financial Markets Department (I.C Sub) Risk Management Unit (within FMD) 2
INVESTMENT POLICY AND OBJECTIVES SAFETY Maintenance of purchasing power of foreign exchange reserves LIQUIDITY Timely availability of funds that can be accessed to meet payment obligations RETURN Subject to liquidity and risk constraints, reasonable earnings are generated. 3
INVESTMENT POLICY AND OBJECTIVES PULA FUND LIQUIDITY PORTFOLIO 100 percent short maturity bonds and bank deposits Lower but stable expected return 35 percent equities 65 percent long maturity bonds Higher expected return over the long term 4
INVESTMENT POLICY AND OBJECTIVES (Contd) PULA FUND LIQUIDITY PORTFOLIO Fund for future generations (quasi SWF) Short-term portfolio to cover six months of import cover Safety Return Liquidity Safety Liquidity Return 5
RESERVES STRUCTURE AGGREGATE PORTFOLIO IMF ( LIQUIDITY PORTFOLIO PULA FUND (6-months import cover) LIQUIDITY INVESTMENT TRANCHE TRANSACTION BALANCE TRANCHE GLOBAL FIXED INCOME EQUITIES REGIONAL MANDATES (USA, Europe, Japan, UK) GLOBAL MANDATE 6 6
PORTFOLIO MANAGERS Pula Fund Bonds External Mangers Equities (35 percent) (65 percent ) Bank of Botswana External managers 7
Market Risk/Systematic risk Negative returns due to market factors. Accept risk is inherent in portfolio Identify and manage the risk 8
Managing Currency Risk Invest in well developed financial markets Currency must be convertible Minimum rating Aa/AA Currency Exposure Limits (+/- 5 or 10% vs Benchmark) Non benchmark currencies max 5 percent Hedging- forwards and derivatives. Derivatives allowed only for hedging or portfolio rebalancing 9
Managing Interest Risk Adverse movements in interest rates Duration- most widely used measure BoB uses modified duration Duration buckets Duration decision taken by I.C Local market duration Total portfolio duration limit +/-1.5 years Internal portfolio managers +/- 0.2 years Correct deviation within two business days 10
Tracking Risk Difference between portfolio return and benchmark return TE = Return (p) Return (BM) But model uses standard deviation of differences in portfolio and benchmark returns 3-year rolling tracking error target. Weekly Tracking error for Sub-I.C Quarterly Tracking Error Custodian Reports 11
Value at Risk An estimate of what the portfolio could lose Set time period normally 3-months Certain level of confidence (95%) 12
Bank Risk Deposit Takers Based on credit ratings Monthly setting of exposure limits Daily monitoring of exposures 13
Fund Manager Monitoring Daily compliance monitoring Compliance Radar Email alerts Weekly fund manager reports Monthly reports. 14
RISK ASSOCIATED WITH QUASI SWF Reserves are in the balance sheet of BoB Not independent Unplanned withdrawal for fiscal expenditure 15
CONCLUSION A robust risk management framework is important Manage risk, do not avoid it Have a risk budget KNOW YOUR PORTFOLIO CHARATERITICS !!!!! 16
