Repealed Subsidiary 2007/002
Financial Services (Investment and Fiduciary Services)
FINANCIAL SERVICES (CAPITAL ADEQUACY OF INVESTMENT
FIRMS) REGULATIONS 2007 the investment firm has established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk-measurement system;
the investment firm’s model has a proven track record of reasonable accuracy in measuring risks;
the investment firm frequently conducts a rigorous programme of stress testing and the results of these tests are reviewed by senior management and reflected in the policies and limits it sets. This process shall particularly address illiquidity of markets in stressed market conditions, concentration risk, one way markets, event and jump-to-default risks, non-linearity of products, deep out-of-the-money positions, positions subject to the gapping of prices and other risks that may not be captured appropriately in the internal models. The shocks applied shall reflect the nature of the portfolios and the time it could take to hedge out or manage risks under severe market conditions; and
the investment firm conducts, as part of its regular internal auditing process, an independent review of its risk measurement system.
The review referred to in paragraph (h) of the first paragraph shall include both the activities of the business trading units and of the independent risk control unit. At least once a year, the investment firm must conduct a review of its overall risk management process.
The review shall consider the following–
the adequacy of the documentation of the risk-management system and process and the organisation of the risk control unit;
the integration of market risk measures into daily risk management and the integrity of the management information system;
the process the investment firm employs for approving risk- pricing models and valuation systems that are used by front and back office personnel;
the scope of market risks captured by the risk-measurement model and the validation of any significant changes in the risk measurement process;