83 / 120
80
Mega ICBC
-80-
analyzes information from finance department on a daily basis. If there is any early warning indicator approaching stop-loss, Risk
Management Department will request Financial Risk Management Center to inform Treasury Department of increasing attention in
response to changes in market. Besides, Risk Management Department monthly summarizes and analyzes data collected from
positions of various financial instruments, profit and loss assessment, analysis on risk-sensitive factors, and stress testing for senior
management’s knowledge of the Bank’s market risk exposure profile.
E.
Market risk measurement and control principle
(A)
The Bank’s market risk report contains interest rate, exchange rate, positions of equity securities, credit default swap (CDS) and
profit and loss assessment. Every transaction has limit and stop-loss provisions, which shall be submitted to approval management
in accordance with the Bank’s regulations. Stop-loss limit shall be implemented as soon as a transaction reaches the threhold. If no
stop-loss limit will be implemented, trading units shall immediately make statement about reasons to not implement stop-loss limit
and coping plan, which shall be submitted to senior management for approval and reported to the Board of (Managing) Directors
regularly.
(B)
Non-hedging trading positions of derivative financial instruments are daily assessed based on the market value, whereas hedging
trading positions of futures are daily assessed and others are assessed twice a month.
(C)
SUMMIT information system and DW information system for market risk provides functions in relation to risk management such
as real-time limits, profit and loss assessment, analysis on risk-sensitive factors, stress testing, and VaR calculation.
F.
Policies and procedures of trading-book risk management
The Bank and its subsidiaries daily monitor trading-book positions, changes in risk exposures, and various risk limits, including trading
rooms, traders and product line risk limits.
If trading-book financial instruments have market price, the valuation of those instruments is conducted at least one time daily using the
independent source and available information. If using mathematical model valuation, the assumptions and parameters used in the model
are reviewed regularly.
Risk measurement methods include VaR and sensitivity analysis.
The Bank and its subsidiaries conduct stress test on the positions of its interest rate, foreign exchange rate products, equity securities and
credit default swap (CDS) on the assumptions of the monthly change in interest rate, securities market index, foreign exchange rate and
CDS by 1%, 15% , 3% and 100 base points, respectively, and reports to the Asset & Liability and Risk Management Committee.
G.
Trading-book interest rate risk management
T rading-book interest rate risk refers to the financial loss of the decline in values of interest rate products held due to unfavorable changes
in interest rates, including securities and derivatives with interest.
The Bank and its subsidiaries interest rate products are traded mainly for hedging.
The trading group screens the credits and financial positions of issuers and selects investment objectives by judging interest rate trend
and a variety of country risks and based on the authorized minimum investment criteria. The Bank and its subsidiaries set trading-book
trading limits and stop-loss limits (including trading rooms, traders, trading products, counterparties, and daily and overnight limits) based
on business strategies and market conditions, and measure monthly the extent of impact of interest rate risk on investment portfolios using
DV01 value.
H.
Banking book interest rate risk management
Banking book interest rate risk mainly comes from the unmatched maturity dates of assets and liabilities or price resetting dates, and
inconsistent changes in base interest rates for assets and liabilities. The Bank and its subsidiaries’ interest rate risk mainly comes from the
unmatched periods of interest-rate sensitive assets and liabilities of the Bank and its subsidaries.
As the Bank and its subsidiaries have interest-rate sensitive gaps, market interest rate fluctuations have good or bad impacts on the Bank
and its subsidiaries’ earnings and cash flows.
The Bank and its subsidiaries manage Banking book interest rate risk by using repricing gap analysis. The interest-rate repricing gap
analysis is to estimate the difference between the assets and liabilities with interest bearing that are to be due near or repriced within a
certain period and measure the impact of interest rate change on net interest revenue. The analysis assumes assets and liabilities structure
remain unchanged and there are parallel movements of interest rate curves, and excludes the customer behavior, basis risk, option
characteristics of early repayment of bonds. The Bank and its subsidiaries calculate the change in net interest revenue for this year and
also monitor the percentage of change in net interest revenue to the projection of net interest revenue for this year.
The Bank and its subsidiaries monthly analyze and monitor interest rate risk positions limits and various interest rate risk management
indexes. If any risk management index exceeds limit, the Bank and its subsidiaries will adopt responding measures and report the analysis
and monitoring results to the Fund Management Committee, the Asset & Liability and Risk Management Committee and the Board of
Directors.
I.
Foreign exchange risk management
Foreign exchange risk refers to the losses caused by the exchange of two different currencies at different times. The Bank and its
subsidiaries’ foreign exchange risk mainly comes from its derivative instruments business such as spot foreign exchange, forward foreign
exchange and foreign exchange options. The foreign exchange trading of the Bank and its subsidiaries are mainly for offsetting customers’
positions on the same day; therefore, foreign exchange risk is relatively low.
To control trading-book foreign exchange risk, subsidiaries have set trading limits and stop-loss limits for trading rooms and traders and
also set the annual maximum loss limits to control the losses within the tolerable scopes.