Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries

ief, the policies and procedures should lay out the scope of businessactivities, the organisation structure showing clear reporting line, authorityand responsibility for each business activity indicating the segregation ofduties, the framework of risk management system demonstrating the riskidentification process, risk measurement methodology and the risk reportingmechanism.Our experience is that most banks have some kind of policies and procedures,but many of them are either too brief or not updated. For some banks,their policies and procedures have remained unchanged for years eventhough the banks may have gone through several organisational changes.And in some cases, the policy is so brief that the operational staff do nothave a clear idea about how the policy should be properly implemented.Policies and procedures are like the rules of the volleyball game. Everyoneinvolved in the game, including the referees, should know all but "not some"of the rules. Therefore, policies and procedures should be written asclearly as possible and all the staff involved should be asked to read andunderstand the rules. However, unlike volleyball game, the game ofderivatives changes rapidly and it is important to constantly review the rulesto make sure that they are still applicable.The next issue is the establishment of a risk management system.This is notthe duty of the risk manager but the senior management. The Board ofDirectors and senior management are the ones responsible for allocatingthe resources. If the senior management decide to engage in derivativeactivities, they should first think about the resources needed to establish agood risk management system. These are the necessary steps for conductingderivatives business, similar to renting an office and furniture, hiring a branchmanager and operating staff before opening a branch. What we wish topoint out here is resource commitment. We have seen some banks whichhurried into the derivatives market, yet the senior management were reluctantto set up the necessary infrastructure, like the installation of appropriaterisk management system and the recruiting of experienced back office andmiddle office staff.j|j||3Managing Risks in Banks