2018 Registration document and annual fi nancial report - BNP PARIBAS 399
5RISKS AND CAPITAL ADEQUACY PILLAR 3
5
Market risk
This mission consists of defi ning, 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 fi nancial 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 markets. 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. It meets approximately monthly and is chaired by either the Group Chief Executive Offi cer or by a Deputy Bank s Chief Operating Offi cer;
■ the Product and Financial Control Committee (PFC) is the arbitration and pricing decision-making committee regarding fi nancial instrument valuation matters. It 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 Offi cer 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 C ommittee 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 arbitration decision.
VALUATION CONTROL [Audited] 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 fi nancial instruments classifi ed 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 specifi c 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-offi ce teams. However, the most complex transactions are controlled by RISK.
Market Parameter (MAP) review Independent Price Verifi cation
Price verifi cation 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 Verifi cation 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 defi ned for each point in time and the conclusions of the Market Parameter reviews are documented in the MAP review fi nding 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, where fi nal decision or escalation is made. The opinion of the control functions prevails, however, signifi cant 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 offi ce 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:
■ Models validation, by which a formal decision to approve or reject a model is taken, including following any modifi cation of the valuation methodology called a Valuation Model Event . In all cases, the approval decisions are taken by a senior RISK analyst during a specifi c VMC. The review required by the validation process can be fast track or comprehensive; in the latter case, the reasons and conditions for approval are detailed in a model approval document;
