The third session of NHC Market Risk Salon focused on Market Risk Framework. It took place at the University of Toronto on April 27, 2017. This session consisted of three parts:
a 10-minute quick review on the previous session; a one-hour presentation by Mr. Jinghua Cao, Senior Manager, Trade Floor Risk Management at Scotiabank; and a one-hour panel discussion joined by Dr. Shawn Meng, Director, Valuation Product Control at BMO and by Mr. Charles Li, Director, Trade Floor Risk Management at Scotiabank, moderated by Dr. Dmitri Rubisov, Managing Director at BMO.
In the review of Session 2 which focused on Market Risk Measurement, Dr. Rubisov commented on participants responses to the quiz questions. He explained the reasons behind daily and weekly stressed VaR calculation, and then illustrated the relations between VaR, general VaR and specific VaR. Dmitri also elaborated on back test breaches and why their absence is not desirable.
In his presentation, Mr. Jinghua Cao covered five topics, which explain market risk framework. He first explained why banks have market risk exposures from FX, FI, equities, commodities and credit. After that he introduced the market risk framework, with an emphasis on risk management trade-off between risk and return to maximize shareholder value. Mr. Cao also discussed three lines of defense in market risk, and the selection of market risk factors, using examples from interest rate risk, credit spread risk, foreign exchange risk, equity risk and commodity risk. An overview of trading and non-trading transactions was also presented. Following the transaction overview, Mr. Cao compared typical daily VaR values for some international banks and discussed financial models and common valuation methods used by major banks. At the end of his presentation, Mr. Cao spoke about a typical day in market risk management, reviewing a busy and challenging work of desk risk managers.
In the panel discussion, Dr. Shawn Meng, Mr. Charles Li, and Mr. Jinghua Cao spoke about their typical days in the trade floor risk management, discussing their approaches to build an efficient and rewarding relationship with traders. They also spoke about changing trends in desk risk management in the past few years. Panelists also explained key concepts that are closely related to their daily work – Funding Value Adjustment (FVA), Credit Value Adjustment (CVA), and Debt Value Adjustment (DVA). This discussion raised more questions on the role of the Central Clearing Counterparty House (CCP) and led to an interesting discussion about how transactions are cleared in the OTC market, including bilateral clearing and central clearing. The CCP regulation requiring standardized trades between financial institutions was also discussed.
This session explored the market risk framework adopted by major banks and helped the audience understand the embedded key risk factors, common models, and valuation methods.
NHC Risk Salon continued its tradition to provide participants with an excellent opportunity to learn from experienced industry professionals.