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UNCLASSIFIED / NON CLASSIFIÉ
Canadian Annual Derivatives Conference2005
Bruce Rutherford
Managing Director
Capital Markets Risk Assessment Services (CMRAS)
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Agenda
1. Who are we and what do we do? OSFI Capital Markets Risk Assessment Services
2. Derivatives Our views Impact on our work
1. Who are we and what do we do? OSFI Capital Markets Risk Assessment Services
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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
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OSFI’s mandate
Safeguard policyholders, depositors and pension plan members from undue loss
Maintain public confidence in the financial system
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OSFI activities
1. Regulation– Develop and interpret legislation and
regulations– Issue guidelines– Approve requests
2. Supervision– Assess safety and soundness – Intervene in a timely manner
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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
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Agenda
1. Who are we and what do we do?– OSFI– Capital Markets Risk Assessment
Services
2. Derivatives• Our view• Impact on our work
2. Derivatives• Our views• Impact on our work
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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…
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Derivatives – Our review framework
Pre-trading processes (Intent)
• Business planning• Trading strategies• Risk appetite
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)
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Derivatives – Impact on risks
• Traditional risks are better understood and more transparent
Traditional Risks
• Credit spread• Credit default• Interest rate• FX• Equity
New Risks
• Credit correlation• Model risk• Infrastructure• Reputational risk• Systemic risk
• Risk migration/substitution
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Derivatives – Our review framework
Pre-trading processes (Intent)• Business planning• Trading strategies• Risk appetite
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)
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New product approvalReputational risk review
Deal capture (exotic/structured products)Model riskSystems integration
P&L explanationProcess sign-offs
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Takeaways
1. From our viewpoint, derivatives are not inherently good nor bad; what matters is how they are used
2. Increasing complexity of derivatives impacts:• Types of risk institutions are exposed to• Our supervisory review framework
3. In the current dynamic regulatory environment, we are involved in:• Development of international guidance• Interpretation and application to Canadian
banking industry
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