2020 Universal registration document and annual financial report - BNP PARIBAS 429
5risks and CaPital adequaCy Pillar 3
5
Market risk
This mission consists of defining, measuring and analysing risk factors and sensitivities, as well as measuring and controlling Value at Risk (VaR), the global indicator of potential losses. RISK ensures that all business activity complies with the limits approved by the various committees and approves new activities and major transactions, reviews and approves position valuation models and conducts a monthly review of market parameters (MAP review) in association with the Valuation and Risk Control Department (V&RC).
Market Risk and financial instrument valuation monitoring is structured around several formal committees:
■ the Capital Markets Risk Committee (CMRC) is the main committee governing the risks related to capital market activities. It is responsible for addressing, in a coherent manner, the issues related to market and counterparty risk. The CMRC follows the evolution of the main exposures and stress risk and sets the high level trading limits. The Committee meets approximately monthly. It is chaired by either the Group Chief Executive Officer or by a Deputy Bank s Chief Operating Officer;
■ the Product and Financial Control Committee (PFC) is the arbitration and pricing decision-making committee regarding financial instrument valuation matters. The Committee meets quarterly and discusses the conclusions of the CIB Financial Control teams and their work to enhance control effectiveness and the reliability of the measurement and recognition of the results of market transactions. It is chaired by the Group Chief Financial Officer and brings together the Directors of Finance-Accounting, Corporate & Institutional Banking and RISK;
■ at business line level, the Valuation Review Committee (VRC) meets monthly to examine and approve the results of Market parameters review (MAP review) and any changes in reserves. The Valuation Review Committee also acts as the referee in any disagreements between trading and control functions. The Committee is chaired by the Senior Trader and other members include representatives from trading, RISK, the CIB Valuation and Risk Control Group (V&RC) team, and Finance. Any disagreement is escalated to the PFC;
■ the Valuation Methodology Committee (VMC) meets quarterly per business line to monitor model approvals and reviews, follow up relevant recommendations and present model governance improvements. This committee is chaired by RISK GM and includes representatives from trading, research, and the valuation and risk control (V&RC) team of CIB and Finance. Any disagreement can be escalated to the PFC, which can make an arbitrage decision.
VALUATION CONTROL Financial instruments in the prudential trading book are valued and reported at market or model value through P&L, in compliance with applicable accounting standards. Such can also be the case of financial instruments classified in the banking book.
Portfolio valuation control is described in the Charter of Responsibility for Valuation, which sets out the division of responsibilities. These governance policies and practices also apply to all ALM Treasury activities.
In addition to the charter, the relevant valuation controls are detailed in specific policies. The main processes that together form the valuation control governance mechanism are set out below.
Transaction accounting control
This control is under the responsibility of middle-office teams. However, the most complex transactions are controlled by RISK.
Market Parameter (MAP) review Independent Price Verification
Price verification is managed jointly by Valuation and Risk Control (V&RC) and RISK. Daily controls are performed on the most liquid parameters and a comprehensive and formal review of all the market parameters is performed at month end. The types of parameters controlled by V&RC are listed precisely; these are essentially the parameters for which an automatic control against external sources can be implemented (security prices, vanilla parameters); this may include the use of consensus price services. RISK is in charge of controlling valuation methodologies as well as the most complex parameters that are very dependent on the choice of models.
The general principles of the Market Parameter review are described in the Charter of Responsibility for Valuation as well as specialised global policies such as the Global Marking and Independent Price Verification Policy and MAP Review Principles. The specific methodologies are described in documents known as the MAP Books organised by product lines and regularly updated. The responsibilities of RISK and V&RC are defined for each point in time and the conclusions of the Market Parameter reviews are documented in the MAP review finding documents.
The outcome of the Market parameter review is the estimation of valuation adjustments communicated to the middle-office, which enters it in the accounting records. The results are communicated to the Trading management during the Valuation Review Committees. The opinion of the control functions prevails, however, significant and persistent disagreement can be escalated to the PFC.
Model Approval and Reviews
The governance of model controls is described in the Valuation Methodology Control Policy (VMCP).
Front office quantitative analysts design and propose the methodologies used to value the product and measure the risks that are used to take trading decisions. The research team and IT are responsible for the implementation of these models in the systems.
The independent control of the valuation models falls under the responsibility of RISK and includes:
■ model validation, by which a formal decision to approve or reject a model is taken, including following any modification of the valuation methodology called a Valuation Model Event . In all cases, the approval decisions are taken by a senior RISK analyst during a specific VMC. The review required by the validation process can be fast track or
