RM-4.3 RM-4.3 Operational Considerations
RM-4.3.1
Islamic bank licensees must implement an appropriate framework for market risk management (including reporting) in respect of all related assets held, including those that do not have a ready market and/or are exposed to high price volatility.January 2013RM-4.3.2
The Board must develop a market risk strategy including the level of acceptable market risk appetite taking into account contractual agreements with fund providers, types of risk-taking activities and target markets in order to maximise returns while keeping exposures at or below the pre-determined levels. The strategy must be reviewed periodically by the Board, communicated to relevant staff and disclosed to fund providers.
January 2013RM-4.3.3
Islamic bank licensees must establish an appropriate sound and comprehensive market risk management process and information system, which (among others) comprise:(a) A conceptual framework to assist in identifying underlying market risks;(b) Guidelines governing risk taking activities in different portfolios of assets financed by investments accounts and portfolios of Collective Investment Undertakings and their market risk limits;(c) Appropriate frameworks for pricing, valuation and income recognition; and(d) A strong MIS for controlling, monitoring and reporting market risk exposure and performance to appropriate levels of senior management.Given that all the required measures are in place (e.g. pricing, valuation and income recognition frameworks, strong MIS for managing exposures, etc.), the applicability of any market risk management framework that has been developed must be assessed taking into account consequential business and reputation risks.
January 2013RM-4.3.4
Islamic bank licensees must be able to quantify market risk exposures and assess exposure to the probability of future losses in their net open asset positions.January 2013RM-4.3.5
The risk exposures in investment securities are similar to the risks faced by conventional financial intermediaries, namely market price, liquidity, foreign exchange rates and credit risk. In this regard,
Islamic bank licensees must ensure that their strategy includes the definition of their risk appetite for these tradable assets and that this risk appetite is adequately supported by capital held for that purpose.January 2013RM-4.3.6
In the valuation of assets where no direct market prices are available,
Islamic bank licensees must incorporate in their own product programme a detailed approach to valuing their market risk positions.January 2013RM-4.3.7
Islamic bank licensees may employ appropriate forecasting techniques agreed with their external auditor to assess the potential value of these assets.January 2013RM-4.3.8
Where available valuation methodologies are deficient,
Islamic bank licensees must assess the need to:(a) Allocate funds to cover risks resulting from illiquidity, new assets and uncertainty in assumptions underlying valuation and realisation; and(b) Establish a contractual agreement with the counterparty specifying the methods to be used in valuing the assets.9
9 It should be noted that similar arrangements are suggested to mitigate contract cancellation, which is explained under RM-2 Credit Risk.
January 2013Collective Investment Undertakings (CIUs)
RM-4.3.9
Islamic bank licensees have a fiduciary duty to apply the same risk management policies and procedures to assets held on behalf of investors in CIUs as they do for assets held on behalf of shareholders and unrestricted IAH.January 2013RM-4.3.10
Where
Islamic bank licensees play the role of market maker to CIUs, this gives rise to liquidity risk, which should be managed according to appropriate procedures as set out in Chapter RM-5January 2013
