Managing Market Risk

EY CAFTA Case Championship

 AGENDA
Market risk in the transformative
age
1
Risk Management roles and
responsibilities
2
Measuring Risk
3
The Risk and Control Function of
the future
4
Discussion on Roadmap, next steps and
closing remarks
Market risk in the transformative age
Financial risks are often associated with the overall market risk in the business environment. Adverse movement in currency
exchange rate, interest rate and commodity prices affect the value of the financial assets of a company.

Foreign Interest Rate

01 02
exchange risk Risk
Exchange rate risk Fluctuations in
caused by interest rates due
fluctuations in the to central bank
foreign currency. policies measures

Commodity
Country Risk

04
Risk

03
Risks associated
Volatility in price of with international
commodity due to incidents and
demand/ supply market events.
side crisis.
Risk management roles and responsibilities across the three lines of defence
(LOD)
As the risk and regulatory universe evolves,
Organisations adopt the three lines of defence model to ensure robust organisation’s are beginning to reimagine their
control environments for managing risk throughout their organisations. existing models through a more strategic long-
term lens and look to streamline existing
practices to gain efficiencies.
First line of defence (1LOD)
✓ 1LOD are the front line operational areas of the business.
✓ Function: Risk ownership
Key responsibilities: Identifying and monitoring risks, owning, operating and
✓
assessing effectiveness of controls, operating within risk appetite ✓ Automation and real time identification of
issues and corresponding mitigating
action.
Second line of defence (2LOD)
✓ Establish a common taxonomy for
✓ 2LOD provide independent risk oversight and management. controls and ensure, policies, risks and
✓ Function: Risk oversight regulations are mapped.
✓ Key responsibilities: Establishing risk policies and standards, setting risk
appetite statements, assessing the 1LOD risk management activities and ✓ Leverage emerging technologies and
controls, reporting on risk and control profile to risk committees
analytics tools to enable ongoing risk
Third line of defence (3LOD) monitoring.
✓ 3LOD are an audit function that operates independently from the business.
✓ Function: Risk assurance
✓ Key responsibilities: Assessing and evaluating compliance with controls,
policies and procedures and provide independent assurance to the audit
committee and Board.
Measuring Risk
Evaluate and quantify the amount of risk exposure of the company

Value at Risk

1
VaR is a measure that quantifies the maximum possible loss that can occur within a
specified confidence interval. The confidence interval measures the certainty with which
the value lies within a given interval. For example, a 95% confidence interval implies that
there is a 95% probability that the true value of the parameter lies within a given interval.
To calculate the VaR for a given exposure, the following parameters will be considered:
1. Standard deviation of given data said for a period of time
2. Current market value
3. Level of significance

2 Scenario Analysis
Scenario analysis is a process of analysing possible future events by considering alternative
possible outcomes. Thus, scenario analysis, which is one of the main forms of projection and of
measuring the amount of associated risk, tries to predict multiple future scenarios.
The Risk and Control Function of the Future
TODAY TOMORROW

1. Risk Priorities
Enable innovation and speed to Reflect and consider outside risks
From a focus on the downside risks inherent market by evaluating upside which are outside your control but
within the business risks of new activities may impact your business

2. Risk Evaluation PREPAR-

Impact EDNESS
Likelihood Impact Risks is being evaluated across various
Impact other dimensions including
Risks are primarily evaluated across two core Likelihood preparedness, impact and vulnerability
dimensions VULNER-
ABILITY

3. Monitoring & Testing From primarily detective and a reactive, sampling- To dynamic risk monitoring, providing risk reporting on a real-time basis.
based approach

4. Model Governance Limited adoption of technology and oversight
of the underlying algorithms
► ‘Robot assurance’ and governance are essential to ensure intended outcomes
are continuously delivered as robotic process automation techniques and
machine learning is adopted
► Data-related risk emerges as a top risk as it becomes part of the fabric of how
firms operate and demonstrate control
 Some pressing questions…..

Is your organization well equipped to in terms of

people and technology to identify, assess, control
and monitor risk? How best we can align risk management priorities
with the business strategy?

Issues:
Risk Identification
Risk assessment How do we manage heightened risk induced
How well risks are assessed within the & evaluation by volatile markets?
organization?
Risk management & How do we ensure that apt risk assessments
How well will we manage diverse set of evolving are made when introducing new information
strategy
market risk? and technology into the organization?
Quantifying the risk

What are the best practices of objectively assessing the

market risk the company is exposed to? How do we identify and anticipate emerging risk?
How do we recognize the potential risks of utilizing
emerging technologies to manage market risk?