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Other Areas of Examination Interest
Risk Management of
Financial Derivatives
Comptroller’s Handbook
January 1997
O-Der
Comptroller of the Currency
Administrator of National Banks
O
Comptroller' s Handbook
i
Risk Management of Financial Derivatives
Risk M anagement
of Financial Derivatives
Table of Contents
Introduction
1
Background
1
Risks Associated With Derivative Activities
2
Use of This Guidance
2
Roles Banks Take in Derivative Activities
3
Senior M anagement and Board Oversight
6
Policies and Procedures
6
New Products
7
Oversight Mechanisms
8
Risk M easurement
10
Risk Limits
11
Risk-Adjusted Return Analysis
12
Affiliates
12
Management Information Systems
13
Personnel and Compensation Plans
13
Strategic Risk
15
Reputation Risk
17
Price Risk
18
Types of Price Risk
18
Price Risk M anagement
21
Pricing and Revaluation Systems
22
Price Risk M easurement
22
Evaluating Price Risk M easurement
23
Price Risk Limits
24
Management Information Systems
26
Interest Rate Risk
29
Interest Rate Risk M anagement
30
Interest Rate Risk M easurement
31
Interest Rate Risk Limits
32
Management Information Systems
33
Liquidity Risk
35
Types of Liquidity Risk
35
Liquidity Risk M anagement
38
Liquidity Risk M easurement
39
Liquidity Risk Limits
40
Management Information Systems
41
Foreign Exchange Risk
42
Credit Risk
43
Types of Credit Risk
43
Risk Management of Financial Derivatives
ii
Comptroller' s Handbook
Credit Risk M anagement
44
Credit Risk M easurement
48
Credit Risk Limits
50
M echanisms to Reduce Credit Exposure
50
Management Information Systems
51
Transaction Risk
53
Transaction Risk M anagement
53
Transaction Risk M easurement
55
Role of Operations
55
Compliance Risk
64
Counterparty Authority
64
Credit Enhancement
66
Bilateral Netting
66
Multilateral Netting
68
Physical Commodities
70
Equity Derivatives
70
Capital Issues
71
Accounting Issues
72
Examination Objectives
73
Sample Request Letter
74
Tier I and Tier II Dealers
74
Active Position-Takers/ Limited End-Users
79
Examination Procedures
82
Evaluation of Bank’s Participation in Derivatives Markets
82
Tier I and Tier II Dealers
85
Active Position-Takers and Limited End-Users
115
Internal Control Questionnaire
133
Tier I and Tier II Dealers
133
Active Position-Takers and Limited End-Users
147
Verification Procedures
157
Appendix
161
A. Uniform Product Assessment
161
B. The “Greeks”
162
C. Evaluating M odels for M easuring Price Risk
165
D. Evaluating Price Risk M easurement
169
E. Stress Testing
172
F. Interconnection Risk
173
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