Actualidad Peru

Regulations on managing market risk

SBS Resolution 4906-2017

The Banking, Insurance & Pension Fund Management Authority (SBS) has published Regulations on managing market risk, which apply to companies in the financial system, as well as to the central bank, Banco Agropecuario (AGROBANCO), Corporación Financiera de Desarrollo (COFIDE) and the MIVIVIENDA Fund. This regulation brings together in one place the regulations on supervising market risk and managing exchange rate risk, and strengthens the current guidelines in the Corporate Governance & Integrated Risk Management Regulation, analyzed in Progreso 10.

The Regulation defines market risk as the likelihood of losses arising from oscillations in the interest rate, currency exchange rates, the prices of variable income instruments and other market prices that have an impact on the valuation of positions in financial instruments.

So that institutions can manage market risk, the regulation identifies who should be in charge of carrying out this function, giving power to the institution’s Board to set up a Market Risk Committee, which should meet at least once a year and consist of three (3) members, one of whom should be a non-executive member of the Board and chair the committee.

Similarly, the professionals responsible for the areas involved in market risk management will have to receive appropriate training, skills and have necessary experience, as well as demonstrating a suitable level of professional ability. They must perform their functions and responsibilities with integrity and ethics.

In terms of market risk limits, the regulation establishes the obligation to set internal thresholds, that are commensurate with the size and complexity of the transactions, risk appetite, the degree of risk exposure and the company’s liquidity and systemic importance.

Based on its exposure to market risk, the SBS may oblige companies in the financial system to apply market risk measurement models, stress tests and retrospective testing; they may also have to prepare a market risk contingency plan and submit to regular validation by an independent unit.

The regulation also provides for exchange rate risk, defining it as the possibility of losses on positions on and off the balance sheet deriving from oscillations in exchange rates and in the price of gold when it is treated as a currency.

Likewise, under the regulation, the Market Risk Unit is responsible for the functions of identifying, measuring, assessing, monitoring, reporting and controlling exchange rate risk; and it sets the limits on the overall overbought/oversold FX position, which is calculated bearing in mind the latest financial statements submitted by the company and authorized by the SBS.

The Regulation will come into force on June 1st, 2018. From this date onwards, the Regulation on Supervising Market Risk (SBS Resolution 509-98) and the Regulation on Exchange Rate Risk (SBS Resolution 1455-2003) will cease to have effect.