Notes to and forming part of the Unconsolidated Financial Statements

For the year ended December 31, 2018

With regard to derivatives, the RMC is authorized to:

- Review the derivatives business with reference to market risk exposure and assign various limits in accordance with
the risk appetite of the Bank.

- Review the Derivatives Business Policy and recommend approval to the BRCC / BoD.

- Review and approve derivatives product programs.

- Authorize changes in procedures and processes regarding derivatives and structured products.

Overall responsibility for derivatives trading activity lies with the Treasury and Capital Markets Group. Measurement and
monitoring of market and credit risk exposure and limits and its reporting to senior management and the BoD is done by
Treasury Middle Office (TMO), which also coordinates with the business regarding approvals for derivatives risk limits.
Treasury Operations records derivatives activity in the Bank’s books, and handles its reporting to the SBP.

Derivatives risk management

There are a number of risks undertaken by the Bank, which need to be monitored and assessed.

Credit risk

Credit risk refers to the risk of non-performance or default by a party to a derivatives transaction, resulting in an adverse
impact on the Bank’s profitability. Credit risk associated with derivatives transactions is categorized into settlement risk
and pre-settlement risk. Credit proposals for derivatives transactions are approved by the Credit Committee. The credit
exposure of each counterparty is estimated and monitored against approved counterparty limits by TMO on a daily basis.

Market risk

The Bank, as a policy, hedges back-to-back all options transactions. In addition, the Bank does not carry any exchange
risk on its Cross Currency Swaps portfolio as it hedges the exposure in the interbank market. To manage the interest rate
risk of Interest Rate Derivatives, the Bank has implemented various limits which are monitored and reported by TMO on a
daily basis.

Liquidity risk

Derivatives transactions, usually being non-funded in nature, do not carry a specific funding liquidity risk.

The liquidity risk arises from the fact that in Pakistan, interest rate derivatives generally have a uni-directional demand,
and no perfect hedge is available. The Bank mitigates its risk by limiting the portfolio in terms of tenor, notional and
sensitivity limits, and can also hedge its risk by taking on and off balance sheet positions in the interbank market, where
available.

Operational risk

The staff involved in the trading, settlement and risk management of derivatives is carefully trained to deal with the
complexities involved in the process. Adequate systems and controls are in place to carry out derivatives transactions
smoothly. Each transaction is processed in accordance with the product program or a transaction memo, which contains
detailed guidance on the accounting and operational aspects of the transaction to further mitigate operational risk. In
addition, TMO and the Compliance and Control Department are assigned the responsibility of monitoring any deviation
from policies and procedures. The Bank’s Audit and Inspection Group also reviews this function, with a regular review of
systems, transactional processes, accounting practices and end-user roles and responsibilities.

The Bank uses FX and Derivatives module of Treasury System which provides an end-to-end valuation solution, supports
the routine transactional process and provides analytical tools to measure various risk exposures, carry out stress tests
and sensitivity analysis.

TMO produces various reports on a periodic basis which are reviewed by senior management. These reports provide
details of the derivatives business profile such as outstanding positions, profitability, risk exposures and the status of
compliance with limits.

112 United Bank Limited