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Central Bank paper focuses on management of market risk

The Central Bank of The Bahamas is seeking to ensure that local financial firms which are Central Bank licensees with direct risk to changing market forces, have the proper framework and risk assessment tools in place to keep their investments sound.

The Central bank has issued a consultation paper for sector participants to comment on, that outlines the draft guidelines for the management of market risk. The bank is hoping to receive comments on the paper from those sector participants by April 15.

Some key elements outlined by the draft guidelines include prudent risk management oversight by the board of directors of financial firms, those firms having proper risk management policies and procedures in place, proper monitoring and controls of risk undertaken, standards for the independent evaluation of risk being undertaken and monitoring and reporting requirements mandated by the Central Bank.

The paper recognizes that,”global markets have become extremely volatile and complex… Financial instruments and trading strategies have become increasingly complex and licensees may be subject to

market risk,”the paper said.

“Market risk refers to the risk that movements in market rates or prices, such as interest rates, foreign exchange rates, equity prices, credit spreads and/or commodity prices, will adversely affect the value of on and off-balance sheet positions of a licensee, resulting in a loss to earnings and capital,”it noted.

The paper added that risks are not exhaustive and can be extremely diverse across myriad licensees.

“Depending on the instruments traded by an institution, exposure to other factors may also arise,”the paper continued.

“To absorb the impact of losses, prudent risk management requires licensees to hold capital commensurate with the level of risk involved. Therefore, a licensee’s consideration of market risk should capture all risk factors to which it is exposed, and it must manage these risks soundly.”

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