Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries
Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries
Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries
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ief, the policies and procedures should lay out the scope of bus<strong>in</strong>essactivities, the organisation structure show<strong>in</strong>g clear report<strong>in</strong>g l<strong>in</strong>e, authorityand responsibility for each bus<strong>in</strong>ess activity <strong>in</strong>dicat<strong>in</strong>g the segregation ofduties, the framework of risk management system demonstrat<strong>in</strong>g the riskidentification process, risk measurement methodology and the risk report<strong>in</strong>gmechanism.Our experience is that most banks have some k<strong>in</strong>d of policies and procedures,but many of them are either too brief or not updated. For some banks,their policies and procedures have rema<strong>in</strong>ed unchanged for years eventhough the banks may have gone through several organisational changes.And <strong>in</strong> 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. Everyone<strong>in</strong>volved <strong>in</strong> the game, <strong>in</strong>clud<strong>in</strong>g 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 <strong>in</strong>volved 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 allocat<strong>in</strong>gthe resources. If the senior management decide to engage <strong>in</strong> derivativeactivities, they should first th<strong>in</strong>k about the resources needed to establish agood risk management system. These are the necessary steps for conduct<strong>in</strong>gderivatives bus<strong>in</strong>ess, similar to rent<strong>in</strong>g an office and furniture, hir<strong>in</strong>g a branchmanager and operat<strong>in</strong>g staff before open<strong>in</strong>g a branch. What we wish topo<strong>in</strong>t out here is resource commitment. We have seen some banks whichhurried <strong>in</strong>to the derivatives market, yet the senior management were reluctantto set up the necessary <strong>in</strong>frastructure, like the <strong>in</strong>stallation of appropriaterisk management system and the recruit<strong>in</strong>g of experienced back office andmiddle office staff.j|j||3Manag<strong>in</strong>g Risks <strong>in</strong> Banks