GARP 2016-FRR Online Access

Implementing a successful RCSA program requires thorough preparation. This includes interviewing participants, stakeholders, and support functions before launching the RCSA to ensure it is well designed and effectively addresses all relevant risks and controls.

Comprehensive and Detailed In-Depth Explanation:

In a single-name Credit Default Swap (CDS), the protection seller (who assumes the credit risk) often posts collateral to the buyer to mitigate counterparty risk. The amount of collateral is typically determined by:

Credit standing of the protection seller:If the seller’s creditworthiness declines (e.g., lower credit rating), more collateral is required to secure the buyer against the seller’s potential default.

Derivatives have several advantages over cash instruments in hedging transactions. These include:

Lower Credit Risk:

Derivatives, especially exchange-traded ones, often have lower credit risk because the clearinghouse guarantees the performance of the contract.

Lower Funding Requirements:

Derivatives typically require lower upfront capital than buying or selling the underlying cash instruments directly. This is due to the leverage they offer, where only a margin is required instead of the full value of the position.

Lower Dealing Costs:

Trading derivatives can be cheaper in terms of transaction costs compared to trading the underlying cash instruments. This is especially true for large positions or frequent trading.

Lower Capital Charges:

Regulatory capital requirements for derivatives can be lower compared to cash instruments because derivatives can be used to hedge and reduce overall portfolio risk, thereby reducing capital charges under regulatory frameworks.

References

Source: How Finance Works​

The market risk management function within a bank encompasses several key roles:

Establish a comprehensive market risk policy framework: This ensures that there are clear guidelines and procedures for managing market risk.

Define, approve, and monitor risk limits: This involves setting boundaries on the levels of risk that can be taken and continuously overseeing them.

Perform stress tests and other qualitative risk assessments: These are conducted to evaluate the bank's resilience to extreme market conditions and to identify potential vulnerabilities.

These activities are crucial for maintaining the bank's overall market risk exposure within acceptable levels.