DBS BANK CHINA LIMITED NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2008 All amounts expressed in Rmb unless otherwise stated
[English translation for reference only]
55
42 FINANCIAL RISK MANAGEMENT continued
42.3 Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is separately managed for the
Bank’s trading portfolio and non-trading portfolio.
i Trading market risk
Trading market risk arises from the impact on trading positions of changes in foreign exchange rates and interest rate yields. It also includes the impact from changes in the
correlations and volatilities of the above risk factors.
The Bank manages trading market risk in the course of structuring and packaging products for investors and other clients, as well as to benefit from market opportunities.
The Bank’s policies and processes for managing trading market risk are approved by senior management and comprise the following elements:
- trading book policy and valuation framework; - types of market risk to be covered, and the risk metrics and methodologies to be used to
capture such risks; - roles and responsibilities of relevant functions in managing trading market risks;
- determination of the Bank’s trading market risk appetite by the Board Audit Committee and allocation of risk limits to risk-takers;
- independent monitoring of market risk appetite and control limits; - assurance of valuation models and validation of risk models; and
- new product process through which risk issues are identified and addressed before a new product is launched.
The Management Committee ‘MC’ serves as the executive forum for overseeing various aspects of market risk taking including framework, limit management, policies, processes,
methodologies and systems.
The principal market risk appetite measures for trading market risk are Value-at-Risk ‘VaR’ and stress loss. This is complemented at the level of risk-taking units by more
granular risk and loss limits such as risk sensitivity-based limits, and management action triggers to measure and control trading exposures.
The Bank’s trading VaR methodology uses a historical simulation approach at a 99 confidence level over a one-day holding period, using a 2-year historical observation
period to forecast the Bank’s trading market risk. The Bank computes VaR in Singaporean Dollars ‘SG’ daily. VaR is back-tested against the profit or loss of the trading
book in line with policy in order to monitor its predictive power.
Although VaR provides valuable insights, no single risk measure can capture all aspects of trading market risk. To complement the VaR measure, regular stress testing is carried out.
The following table shows the year end, average, highest and lowest daily VaR for the trading market risk:
DBS BANK CHINA LIMITED NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2008 All amounts expressed in Rmb unless otherwise stated
[English translation for reference only]
56
42 FINANCIAL RISK MANAGEMENT continued
42.3 Market risk continued i
