Market risk monitoring is based on an analysis of three types of indicators (Sensitivities or ‘Greeks’, VaR and stress tests) which aim to cover the entire scope of market risk.
Market risk sensitivities analysis
Market risk is first analysed by systematically measuring portfolio sensitivity to various market parameters. The infor-mation obtained is used to set tolerance ranges for exposure maturities and size or strike price for option exposures. The results of these sensitivity analyses are compiled at various aggregate position levels and compared with market limits.
Market risk monitoring under normal market conditions Value at Risk (VaR)
VaR is calculated using an internal model. It estimates the potential loss on a trading portfolio under normal market conditions over one trading day, based on changes in the market over the previous 260 business days with a confi-dence level of 99%. The model has been approved by the banking supervisor and takes into account all usual risk factors (interest rates, credit spreads, exchange rates, equity prices, commodities prices, and associated volatilities), and the cor-relation between these factors, in order to include the effects of diversification. It also takes into account specific credit risk.
The algorithms, methodologies and sets of indicators are reviewed and improved regularly to take into account growing market complexity and product sophistication.
In December 2010, BNP Paribas Fortis submitted a request to the French (ACP - Home) and Belgian (NBB - Host) Regulators for perimeter extension of the BNP Paribas internal model to the BNP Paribas Fortis SA/NV legal entity.
This perimeter extension was granted and as of July 2011, the market risk regulatory capital charge on the BNP Paribas Fortis trading portfolio is calculated based on the VaR figure computed with the BNP Paribas internal model.
History of the VaR (10 days, 99%)
The Values at Risk (VaRs) set out below are calculated from an internal model, which uses parameters that comply with the method recommended by the Basel Committee for determining estimated value at risk (‘Supplement to the Capital Accord to Incorporate Market Risks’). They are based on a ten-day time horizon and a 99% confidence interval.
In 2012, total average VaR is EUR 13.0 million (with a minimum of EUR 7.5 million and a maximum of EUR 35.0 million), after taking into account the EUR (5.7) million netting effect between the different types of risks. These amounts break down as follows:
In millions of euros
Type of risk Average Minimum Maximum End of year Average End of year
Interest rate risk 12.3 7.1 36.1 8.6 19.2 9.8
Credit risk 2.9 1.3 9.1 1.6 6.5 6.4
Foreign exchange risk 2.3 0.8 7.8 1.0 2.3 2.8
Equity price risk 1.2 0.0 5.4 0.0 4.3 2.0
Commodity price risk 0.0 0.0 0.0 0.0 0.0 0.0
Netting effect (5.7) (1.7) (23.4) (2.4) (9.2) (9.2)
TOTAL VALUE AT RISK 13.0 7.5 35.0 8.8 23.1 11.8
Year to 31 Dec. 2012 Year to 31 Dec. 2011
Risk exposure in 2011
History of the VaR (1 day, 99%) in 2012
EUR Millions
Total VaR 2012
J F M A M J J A S O N D
0 5 10 15 20 25
0 5 10 15 20 25
The VaR was fairly stable around or just below EUR 5 million in 2012. The peak observed at the end of August is not related to additional risk-taking but to a one-day lag between positions and hedges bookings.
Risk-IM continuously tests the accuracy of its internal model through a variety of techniques, including a regular compari-son over a long-term horizon between actual daily losses on capital market transactions and 1-day VaR. A 99% confidence level means that in theory the Bank should not incur daily losses in excess of VaR more than two or three days a year.
In 2012, daily losses did not exceed the VaR. This implies that no penalty factor was applicable on the VaR figures for the capital computation. A multiplication factor of 4 was applied to the ten-day VaR in the RegCap computation formula. For BNP Paribas Fortis, the back-testing was a real back-testing for the first two quarters (i.e. a back-testing with the observed P&L of the next day and thus including intraday adjustments,
fees and commissions). For the last two quarters of 2012 a real-back testing as well as a hypothetical (i.e. a back-testing comparing theoretical mark-to-market variations on a frozen end-of-day portfolio with the VaR) back-testing is applied.
The outcome of the worse of the two back-testings prevails.
History of the Stressed VaR (10 days, 99%)
A Stressed VaR (SVaR) is computed under Basel 2.5 based on a 12-month stress period. The choice of the selected stress period is subject to annual review. It was revised in June 2012 (from 2008Q1 – 2008Q4 to 2008Q2 – 2009Q1). This method is applied on top of the VaR, to correct the ‘short memory’ of the VaR and to reinforce Specific Risk control.
In 2012, total average 10-day SVaR is EUR 16.1 million (with a minimum of EUR 10.2 million and a maximum of EUR 32.6 million), after taking into account the EUR (9.6) million netting effect between the different types of risks.
In millions of euros
Type of risk Average Minimum Maximum End of Year Average End of Year
Interest rate risk 14.3 9.8 30.1 13.5 14.2 14.3
Credit risk 6.1 1.8 24.6 2.3 16.5 18.4
Foreign exchange risk 3.4 0.8 16.4 2.5 2.9 2.7
Equity risk 1.9 0.0 10.5 0.0 3.1 4.7
Commodity price risk 0.0 0.0 0.0 0.0 0.0 0.0
Netting effect (9.6) (2.2) (49.0) (3.9) (13.4) (16.9)
31 December 2012 31 December 2011
History of the Incremental Risk Capital
An incremental risk capital (IRC) is computed under Basel 2.5.
The IRC approach measures losses due to ratings migration and default, at the 99.9% confidence interval over a capital horizon of one year, assuming a constant level of risk on this horizon. The approach to capturing the incremental default and migration risks covers all positions subject to a capital charge for specific interest rate risk, including all government bonds but excluding securitisation positions and Nth-to-default credit derivatives.
The model is currently used in the risk management processes and a request for homologation submitted to the ACP and the NBB in 2011 was duly approved. It has been applied since 31 December 2011.
The calculation of IRC is based on the assumption of a constant level of risk over the one-year capital horizon, implying that
the trading positions or sets of positions can be rebalanced during the one-year capital horizon in a manner that maintains the initial risk level, measured by the VaR or by the profile exposure by credit rating and concentration. This rebalance frequency is called the ‘liquidity horizon’.
The model is built around a rating-based simulation for each obligor, which captures both the risk of the default and the risk of rating migration. The reliability among obligors is based on a multi-factor asset return model. The valuation of the portfolios is performed in each simulated scenario. The model uses a constant one-year liquidity horizon.
In the fourth quarter of 2012, the total average IRC was EUR 26.3 million (with a minimum of EUR 13.0 million and a maximum of EUR 47.8 million).
In millions of euros
Type of risk Average Minimum Maximum End of Year Average End of Year
TOTAL IRC 26.3 13.0 47.8 21.8 57.8 47.5
31 December 2012 31 December 2011
Comprehensive risk measure (Correlation portfolio)
The comprehensive risk measure (CRM) is a charge for structured credit correlation products in the trading books.
Following the de-risking as set out in the Industrial Plan, the CRM is not applicable to BNP Paribas Fortis.
Securitisation positions in Trading books outside correlation portfolio
Following the de-risking as set out in the Industrial Plan, this additional capital charge for re-securitisation is not applicable to BNP Paribas Fortis.
Market risk monitoring under extreme market conditions Stress tests are simulated in order to assess potential variations in the trading portfolio value in extreme market conditions.
Extreme market conditions are defined by rupture scenarios, for which the assumptions are reviewed according to the economic conditions. The results obtained from the tests are further detailed for the different levels of the Capital Markets activities. Stress testing is intended to make management aware of the risks (and the implications for the income statement) of these extreme and abnormal movements, and so ‘early warning signals’ have been set up to enable all stakeholders to :
adopt the same approach towards the entity’s risk appetite
be warned simultaneously
decide on remedial actions
If stress testing results exceed the early warning signals, they are considered to be triggers for management action. In align-ment with the Group, BNP Paribas Fortis uses 15 macro stress test scenarios covering all Market activities: fixed-income, currency, equity derivatives, commodities and treasury. These scenarios are presented to and reviewed by the CMRC on a bi-monthly basis. The framework was thoroughly reviewed over the summer 2012 and 8 refitted scenarios were adopted.
Additionally, the existing multifactor CMRC market risk stress tests are combined with counterparty risks. This creates a combined markets and counterparty risk stress test scenario.
The Risk department may also outline specific scenarios for managing some types of risks with extra care, most notably the more complex risks requiring a full revaluation rather than an estimate based on sensitivity indicators. The results of these stress tests may be presented to business line managers and stress test limits may be set.