market risk management
DESCRIPTION
Market Risk Management. Jan Sijbrand Chief Risk Officer WCS. 12 November 2001. Market Risk Management at ABN AMRO. Organisation / Control Value at Risk and beyond Risk and reward. Organisational Structure. Managing Board. Legal Audit Finance Personnel Risk. Corporate Centre. - PowerPoint PPT PresentationTRANSCRIPT
Market Risk ManagementJan Sijbrand
Chief Risk Officer WCS
12 November 2001
Market Risk Management
2
Market Risk Management at ABN AMRO
Organisation / Control
Value at Risk and beyond
Risk and reward
Market Risk Management
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Managing Board
Private Clients /Asset Management
Wholesale Client Segment
Commercial &Consumer Segment
Corporate Centre
Product Business
Lines
Chief Risk Officer
Client Business
Lines
-Legal-Audit-Finance-Personnel-Risk
-Retail-SME
Organisational Structure
Market Risk Management
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Organisational Structure
Chairman Wholesale Client Segment
W. Jiskoot
Chief Risk Officer WCSJ. Sijbrand
Group CFO / CROT. de Swaan
Credit ECP
Special Credits
CreditTMT
Credit ACD
Credit FI/PS
Market Risk Control
Product Analysis
AuditLegal
Market Risk Management
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Organisational Structure
Market Risk Control
Market Risk Reporting
Product Line Risk Managers
Local Risk Managers
Market Risk Management
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Market Risk Management
Independent risk management function in Wholesale
Market risk control: risk officers on the floors
Product analysis: approval of new financial instruments
Market Risk Management
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II Value at Risk and beyond
Value at Risk (VatR)
Scenario tests
Greeks and stress tests
Methods, systems and procedures
Market Risk Management
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Global FX6%
Credit Trading21%
Fixed Income41%
Money Market - Repo15%Equity Derivatives
12%
Equity Cash5%
Global VatR breakdown by product lineas of 28 September 2001
Total VatR (group-wide) : EUR 40.9 mln Sum of VatR at desk level: EUR 149 mln
Market Risk Management
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How useful is Value at Risk?
VatR: once in a 100 days we may lose more than this amount
(i.e. 1.65 daily standard deviations)
VatR is a useful concept to see how market risk is distributed over
the bank
VatR on its own is not sufficient as a risk control instrument
Market Risk Management
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Not only Value at Risk but also scenario’s
Black Monday (18 - 20 Oct. ‘87)
Bond crash (18 - 21 Feb. ‘94)
Emerging market crisis (24 - 28 Oct. ‘97)
Financial market crisis (Jul. - Oct. ‘98)
Czech scenario (May ‘97)
Market Risk Management
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Example:Black Monday scenario as run on 11 September: Equity: - EUR 115 mln Fixed Income: + EUR 248 mln
Compared with September 10 - 21 actual results: Equity - EUR 13 mln Fixed Income + EUR 90 mln
Under Black Monday scenario ABN AMRO stood to gain EUR 133 mln on these trading portfolios
In reality Sept. 10 - 21 ABN AMRO earned EUR 77 mln on the portfolios
Not only Value at Risk but also scenario’s
Market Risk Management
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The detail of day to day life in the dealingroom: “Greeks”
PVBP limits per bucket Credit spread PVBP’s Delta Gamma Vega Stress tests (underlying / volatility) Long / short / net on securities Correlation limits Discontinuity limits
Market Risk Management
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Counter liquidity risk in security markets
Limits per issuer (depending on rating)
Balance sheet limits
Percentage of open interest
Percentage of daily turnover
Collateral concentration limits
Market Risk Management
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Limit structure
Products Traded
Basis risks
Concentration / Liquidity
VatR
Stress tests / curvature
Scenarios
Over 24,000 limits, covering the following areas:
Delta, gamma, vega
Notional amounts
Correlation, discontinuity
Market Risk Management
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The coherence of VatR and “Greeks”
ALCO
Group Risk Committee
7 Risk Management Committees
3,000 dealers in 114 dealing rooms
20 VatR limits
600 VatR, scenario and “Greek” limits
24,000 detailed “Greek” limits
Market Risk Management
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Limits and exposures
Limits set in top - down process
Daily control of all risks against their limits
Daily reporting and aggregation at higher level
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Limits and exposures
Exposures (daily)
Limits (irregular in time, at least annually)
traders back office
ALCO
GRC
RMC’s
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Market risk systems overview
Infinity Bloomberg OMR ……….. ………..
Bob Varax
Big Bob
AMLO Treasury& Fixed Income European Equities &
Equity Derivatives
Global Risk Report
RIMS Ronnie 2
Market RiskCore Systems
North/Latin America Risk
Asia Risk Management
TreasuryBranches
Market Risk Management
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ABN AMRO market risk principles
Simple products, larger limits
Complex products, lower limits
Limits are an instrument of delegation; excesses are possible
provided agreed up front
Escalation of any excesses from
RMC GRC ALCO
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Trading of new exotic products
A solid model is developed by Front Office/Product development
Tested by an independent Product Analysis Group
Implemented in system (to calculate prices, hedge ratios,
contribution to VatR)
Tested again by Product Analysis Group
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Approval by Product Group involves 14 steps, among which testing
Correctness of mathematical model
Calibration of model to market data
Statistical/mathematical study of model correctness
Historical hedge performance
Description of risk factors
Model applicability
Approval often only comes with model reserves.These are reserves around model prices that are not taken in the P&L
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III Risk and reward
Market Risk Management
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VatR utilisation in 2001January 2001 - September 2001
(in EUR mio)
0
10
20
30
40
50
60
70
01-Jan-01 31-Jan-01 02-Mar-01 01-Apr-01 01-May-01 31-May-01 30-Jun-01 30-Jul-01 29-Aug-01 28-Sep-01
Market Risk Management
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Total VatR UtilisationJuly 1999 - September 2001
(in EUR mio)
0
10
20
30
40
50
60
70
Increasing FI positions especially by prop. traders.
Building up FI positions in anticipation of Fed. rate cuts.
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Risk and reward
Backtests: comparison of – Profit & Lossversus
– Value at Risk
Actual backtests– Full back office P&L (incl. fees, commissions, intra-day trading)versus
– Value at Risk
Hypothetical backtests– P&L due to just market movementversus
– Value at Risk
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Backtesting resultsActual P&L versus Value at Risk
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
Va
lue
at
Ris
k / P
&L
(E
UR
m)
Value at Risk (VaR) Actual P&L VaR Limit
1 January - 31 December 2000
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Backtesting resultsHypothetical P&L versus Value at Risk
1 January - 31 December 2000
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
Va
lue
at
Ris
k /
P&
L (
EU
Rm
)
Value at Risk (VaR) Hypothetical P&L VaR Limit
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Backtesting resultsActual P&L versus Value at Risk
September 2001
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
Val
ue
at R
isk
/ P&
L (E
UR
m)
Value at Risk (VaR) Actual P&L VaR Limit
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Backtesting resultsHypothetical P&L versus Value at Risk
September 2001
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
Val
ue a
t Ris
k / P
&L
(EU
Rm
)
Value at Risk (VaR) Hypothetical P&L VaR Limit
Market Risk Management
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Risk and reward
Conservatism in ABN AMRO’s Value at Risk
in some cases add-ons for basis risk
credit spread risk added on to general risk
As a consequence: never a VatR breach at aggregate group level
Market Risk Management
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Daily P&L distributionVar P&L Hypo Var P&L Hypo
Max 60.93 27.27 19.17 Max 64.20 62.33 39.49Min 31.50 -5.61 -11.29 Min 34.60 -10.71 -39.07Average 44.06 8.18 1.13 Average 49.41 11.39 3.06Standard Deviation 4.85 4.88 Standard Deviation 8.88 10.85
Year 2000 First 9 months 2001
Daily P&L Distribution(in EUR mio)
-20
0
20
40
60
80
100
120
140
-25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70Daily P&L
No
of
Da
ys
Year 2000
First 9 months 2001
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Risk and reward
Standard deviation of daily P&L distribution is
a better measure of risk than (conservative)
Value at Risk number
Market Risk Management
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Asset & Liability Management
Market Risk Management
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Net interest income of ABN AMRO
Net interest income per currency
35% USD
37% EUR
16% BRL
12% OTHER
Market Risk Management
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ALM in the SBU-organisation
G ro up A LM
W C SW C S A LC O
NL ALC O
BR ALCO
US ALCO
C & C C P C A MP C A M A LC O
G ro u p A L C O
Market Risk Management
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Group ALM responsibilities
Governance / policy setting– Interest rate risk
– Liquidity risk
– Capital management
Profit centre tasks– Funding and capital management structure
– Currency risk hedging of capital
– Overlay portfolio’s for Group interest positions
Market Risk Management
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Interest rate scenarios
ABN AMRO uses interest rate scenarios like– yield curve shifts
– yield curve twists
Input to calculate the impact on– interest income earned
– fair value of equity
Self-imposed corporate limit reflects a moderate
risk appetite in this area
Market Risk Management
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Euro interest position
(80.000)
(60.000)
(40.000)
(20.000)
-
20.000
40.000
60.000
80.000<3
m
4-6
m
7-12
m
1-2
yr
2-3
yr
3-4
yr
4-5
yr
5-7
yr
7-10
yr
10-1
5 yr
>15
yr
Time buckets
EU
R m
ln
Assets
Liabilities
Net position
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Projections net interest income- Scenarios -
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
2000 2001 2002 2003 2004 2005
10-year Gov.
3-mth Euribor
ECB ReFi
Market Risk Management
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90
100
110
120
130
140
2001 2002 2003 2004 2005
Ind
ex
Base-case scenario
Alternative scenario
Projections net interest income- Euro interest position -
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Currency hedging strategy
Strategy / policy– Group ALCO (USD and BRL)
– Group Risk Committee (other currencies)
Group Asset & Liability Management:– gives advise to Group ALCO / Group Risk Committee
– manages pro-actively and selectively the different currency positions within the approved strategy / policy
Hedges– capital hedges
– profit hedges
– ratios hedge
Market Risk Management
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Currency hedging strategy
Capital hedging transactions are limited to existing exposure in
currencies and are selectively (cost-benefit analysis) applied
Ratio hedging transactions are aiming at keeping a constant
BIS ratio hedged against possible currency fluctuations.
Profit hedges are used to protect profit against expected
currency fluctuations.
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Cautionary Statement regarding Forward-Looking Statements
This announcement contains forward-looking statements. Forward-looking statements arestatements that are not historical facts, including statements about our beliefs and expectations.Any statement in this announcement that expresses or implies our intentions, beliefs,expectations or predictions (and the assumptions underlying them) is a forward-lookingstatement. These statements are based on plans, estimates and projections, as they are currentlyavailable to the management of ABN AMRO. Forward-looking statements therefore speak only asof the date they are made, and we take no obligation to update publicly any of them in light ofnew information or future events.
Forward-looking statements involve inherent risks and uncertainties. A number of importantfactors could therefore cause actual future results to differ materially from those expressed orimplied in any forward-looking statement. Such factors include, without limitation, the conditions inthe financial markets in Europe, the United States, Brazil and elsewhere from which we derive asubstantial portion of our trading revenues; potential defaults of borrowers or tradingcounterparties; the implementation of our restructuring including the envisaged reduction inheadcount; the reliability of our risk management policies, procedures and methods; and otherrisks referenced in our filings with the U.S. Securities and Exchange Commission. For moreinformation on these and other factors, please refer to our Annual Report on Form 20-F filed withthe U.S. Securities and Exchange Commission and to any subsequent reports furnished or filedby us with the U.S. Securities and Exchange Commission.
The forward-looking statements contained in this announcement are made as of the date hereof,and the companies assume no obligation to update any of the forward-looking statementscontained in this announcement.