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Cyprus issues new market risk guidelines February 6, 2008

Posted by grhomeboy in Business & Economy.
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Cyprus’s banks have to comply with a new set of guidelines governing market risk management, the island’s Central Bank said yesterday.

The four main types of risks covered in a central bank circular are related to interest rates, equity, foreign exchange and commodities.

Banks, the circular said, must have suitable policies and processes that clearly allocate responsibilities regarding market risk and must set market risk limits proportional to their size.

Systems and controls have to be in place ensuring that all transactions are captured on a timely basis and that market positions are revalued at least on a daily basis.

The new set of guidelines adds to existing ones on the internal capital adequacy assessment process in market risk management. They are applicable to banks supervised by the Central Bank or incorporated in Cyprus, including their subsidiaries and overseas branches.

“The principle of proportionality acknowledges the fact that significant differences may exist between the activities of banks and, consequently, the risks emanating from their activities might not be similar,” the Cyprus’ Central Bank said.

According to the circular, banks have to manage their exposure to market risk both on a stand-alone basis and on a group basis. The banks must also measure market risk by performing scenario analysis, stress testing and contingency planning, as well as periodic validity testing.

Further, “the market data used to value trading book positions must be verified by a function independent of the lines of business, e.g. by the bank’s internal audit function,” the Cyprus’ Central Bank said.

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