My first Publication ocbc_ar17_fullreport_english | Page 92

RISK MANAGEMENT
(This section forms an integral part of OCBC’s audited financial statements)
Group, we are exposed to market risks
from our trading, client servicing and
balance sheet management activities.
within their approved trading strategies
and investment mandates, while MRM
acts as the independent monitoring unit
to ensure sound governance. The key risk
management activities of identification,
measurement, monitoring, control and
reporting are regularly reviewed by
MRM and the MRMC to ensure effective
risk management under prevailing
market conditions.
Our market risk management strategy
and market risk limits are established
within the Group’s risk appetite and
business strategies, taking into
account macroeconomic and market
conditions. Market risk limits are
subject to regular review.
MARKET RISK MANAGEMENT
OVERSIGHT AND ORGANISATION
The Market Risk Management Committee
(“MRMC”) is the senior management
group that supports the BRMC and
CEO in managing market risk. The
MRMC oversees the market risk
management objectives, framework
and policies governing prudent market
risk taking, which are backed by risk
methodologies, measurement systems
and internal controls.
The MRMC is chaired by CRO and
supported by the Market Risk
Management (“MRM”) department.
MRM is the independent risk-control
unit responsible for operationalising the
market risk management framework to
support business growth while ensuring
adequate risk control and oversight.
MARKET RISK MANAGEMENT APPROACH
Market risk management is a shared
responsibility. Business units are
responsible for proactively managing risk
Other Risk Measures
As the Group’s main market risk is interest
rate fluctuations, Present Value of a
Basis Point (“PV01”), which measures
the change in value of interest rate-
sensitive exposures resulting from a one
basis point increase across the entire
yield curve, is an important measure
monitored on a daily basis. Other than
VaR and PV01, other risk measurements
used include notional positions, Profit
& Loss (“P&L”) for One Basis Point Move
in Credit Spreads (“CS01”) and derivative
greeks for specific exposure types.
MARKET RISK IDENTIFICATION
Risk identification is addressed via our
internal NPAP at product inception.
Market risks are also identified by our
risk managers from their ongoing
interactions with the business units.
MARKET RISK MEASUREMENTS
Value-At-Risk
Value-at-risk (“VaR”), as a key market risk
measure for the Group’s trading activities,
is a component of aggregate market risk
appetite. VaR is measured and monitored
by its individual market risk components,
namely interest rate risk, foreign exchange
risk, equity risk and credit spread risk as
well as at the consolidated level. Our VaR
model is based on a historical simulation
at a 99% confidence level, and over a one-
day holding period. As VaR is a statistical
measure based on historical market
fluctuations, past changes in market risk
factors may not accurately predict forward-
looking market conditions all the time.
Under the defined confidence threshold,
losses on a single trading day may exceed
VaR, on average, once every 100 days.
Stress Testing and Scenario Analysis
We perform stress testing and scenario
analysis to better quantify and assess
potential losses arising from low
probability but plausible extreme market
conditions. The stress scenarios are
regularly reviewed and fine-tuned to
ensure that they remain relevant to the
Group’s trading activities and risk profile
as well as prevailing and forecasted
economic conditions. These analyses
determine if potential losses from such
extreme market conditions are within
the Group’s risk tolerance.
The table below provides a summary
of the Group’s trading VaR profile by
risk types as at 31 December 2017 and
31 December 2016.
VaR BY RISK TYPE – Trading Portfolio
2017
SGD Millions
End of
the period Average
5.44
2.13
0.55
1.38
-4.40 5.48
4.97
0.79
1.87
-4.88
5.10 8.24
Interest Rate VaR
Foreign Exchange VaR
Equity VaR
Credit Spread VaR
Diversification Effect (1)
Aggregate VaR
(1)
(2)
90
2016
Minimum
Maximum
2.63
1.81
0.39
1.16
NM (2) 9.06
13.77
2.04
5.49
NM (2)
4.44 15.85
End of
the period Average 3.64
7.69
0.51
4.63
-8.52 3.86
7.1
0.84
4.09
-7.38 2.45
2.34
0.21
1.96
NM (2) 6.73
13.53
2.31
9.95
NM (2)
7.95 8.51 4.48 14.10
Diversification effect is computed as the difference between Aggregate VaR and sum of asset class VaRs.
Not meaningful as the minimum and maximum VaR may have occurred on different days for different asset classes.
OCBC ANNUAL REPORT 2017
Minimum
Maximum