RM-4.1.3

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A licensee's market risk policy document should identify its appetite for market risk, systems for identifying, reporting and documenting market risk and mitigation factors in place. In particular, the market risk policy should cover for market risk:

(a) How, with particular reference to its activities, the licensee defines and measures market risk;

(b) The licensee's business aims in incurring market risk including:

(i) Identifying the types and sources of market risk to which the licensee wishes to be exposed (and the limits on that exposure) and those to which the licensee wishes not to be exposed (and how that is to be achieved);

(ii) Specifying the level of diversification required by the licensee and the licensee's tolerance for risk concentrations (and the limits on those exposures and concentrations);

(c) The licensee's investment strategy;

(d) The financial instruments, commodities, assets and liabilities (and mismatches between assets and liabilities) that a licensee is exposed to and the limits on those exposures;

(e) Activities that are intended to hedge or mitigate market risk including mismatches caused by, for example, differences in the assets and liabilities and maturity mismatches; and

(f) The methods and assumptions used for measuring linear, non-linear and geared market risk including the rationale for selection, ongoing validation and testing. Methods might include stress testing and scenario analysis, option Greeks, asset/liability analysis, correlation analysis and Value-at-Risk (VaR). Exposure to non-linear or geared market risk is typically through the use of derivatives.

Adopted: July 2007