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Canadian Annual Derivatives Conference 2005. Bruce Rutherford Managing Director Capital Markets Risk Assessment Services (CMRAS). Agenda. Who are we and what do we do? OSFI Capital Markets Risk Assessment Services Derivatives Our views Impact on our work. Who are we and what do we do?

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canadian annual derivatives conference 2005

Canadian Annual Derivatives Conference2005

Bruce Rutherford

Managing Director

Capital Markets Risk Assessment Services (CMRAS)

agenda
Agenda
  • Who are we and what do we do?
    • OSFI
    • Capital Markets Risk Assessment Services
  • Derivatives
    • Our views
    • Impact on our work
  • Who are we and what do we do?
    • OSFI
    • Capital Markets Risk Assessment Services

Page 2 / 13

who are we
Who are we?

OSFI is the primary regulator of:

  • Federal Regulated Financial Institutions
    • Deposit Taking Institutions (142)
    • Insurance Companies (302)
  • Private Pension Plans
    • More than 1000

Page 3 / 13

osfi s mandate
OSFI’s mandate
  • Safeguard policyholders, depositors and pension plan members from undue loss
  • Maintain public confidence in the financial system

Page 4 / 13

osfi activities
OSFI activities
  • Regulation
    • Develop and interpret legislation and regulations
    • Issue guidelines
    • Approve requests
  • Supervision
    • Assess safety and soundness
    • Intervene in a timely manner

Page 5 / 13

cmras activities
CMRAS activities

Review trading and treasury operations

  • Assess financial institutions' risk
    • Market and associated operational risks
  • Assess risk management practices

Review and approve internal models

  • Assess risk and valuation models
  • Approve VaR models for market risk regulatory capital

Policy consultation

  • Develop and comment on domestic and international policy, e.g. Basel II
  • Develop and interpret guidelines
  • Transaction analysis

Page 6 / 13

agenda1
Agenda
  • Who are we and what do we do?
    • OSFI
    • Capital Markets Risk Assessment Services
  • Derivatives
    • Our view
    • Impact on our work
  • Derivatives
    • Our views
    • Impact on our work

Page 7 / 13

derivatives various views
Derivatives – Various views

Unfavourable

  • Derivatives are time bombs, both for the parties that deal in them and the economic system
  • Large amounts of risk are concentrated in the hand of few derivative dealers

Favourable

  • Derivative are effective risk management tools
  • Derivatives have improved economic stability
  • Benefits have materially exceeded the costs

Our view:

Derivatives are neither good nor bad…

Page 8 / 13

derivatives our review framework

Post-trading processes (Feedback)

  • P&L reporting
  • Risk reporting
  • Problem reporting
  • Trading processes (Actions)
  • Trader supervision
  • Risk measurement (VaR, Greeks, Stress testing)
  • Supporting operational processes (e.g., Price verification, Deal confirmations)
Derivatives – Our review framework
  • Pre-trading processes (Intent)
  • Business planning
  • Trading strategies
  • Risk appetite

Page 9 / 13

derivatives impact on risks

New Risks

  • Credit correlation
  • Model risk
  • Infrastructure
  • Reputational risk
  • Systemic risk
Derivatives – Impact on risks
  • Risk migration/substitution

Traditional Risks

  • Credit spread
  • Credit default
  • Interest rate
  • FX
  • Equity
  • Traditional risks are better understood and more transparent

Page 10 / 13

derivatives our review framework1

Post-trading processes (Feedback)

  • P&L reporting
  • Risk reporting
  • Problem reporting
  • Trading processes (Actions)
  • Traders supervision
  • Risk measurement (VaR, Greeks, Stress Testing)
  • Supporting operational processes (e.g., Price verification, Deal confirmation)
Derivatives – Our review framework
  • Pre-trading processes (Intent)
  • Business planning
  • Trading strategies
  • Risk appetite
  • New product approval
  • Reputational risk review
  • P&L explanation
  • Process sign-offs
  • Deal capture (exotic/structured products)
  • Model risk
  • Systems integration

Page 11 / 13

takeaways
Takeaways
  • From our viewpoint, derivatives are not inherently good nor bad; what matters is how they are used
  • Increasing complexity of derivatives impacts:
    • Types of risk institutions are exposed to
    • Our supervisory review framework
  • In the current dynamic regulatory environment, we are involved in:
    • Development of international guidance
    • Interpretation and application to Canadian banking industry

Page 12 / 13

questions
Questions?

Bruce.Rutherford@osfi-bsif.gc.ca

Keith.Isaac@osfi-bsif.gc.ca

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