Gunster – Banking Advisory, January 2009
On January 14, 2009, the Board of Governors of the Federal Reserve System (“Federal Reserve”) issueda Supervisory Letter (“SR Letter”) to assist banking organizations which are subject to the Federal Reserve’s Market Risk Rule (“MRR”) with appropriate and consistent implementation of theMMR.The MMR establishes regulatory capitalrequirements for bank holding companies and state member banks that have significant exposure to certain market risks (“MMR-subject Banking Organizations”). The MMR sets out market risk management requirements, including a requirement to identify market risks and implement a sound risk management program. The SR Letter reiterates some of the MRR’s core requirements, provides guidance on certain technical aspects of the rule, and addresses several issueswhere the Federal Reserve has identified the need for clarification.For example, the MMR requires that MMR-subject Banking Organizations use an internal value-at-riskmodel (“VaR Model”) that has been approved by the Federal Reserve as the basis for determining generalmarket-risk capital charges. The SR Letter remindsMMR-subject Banking Organizations that, withintheir VaR Model, they must capture: (i) all of theircovered positions including all positions in their trading accounts, and all foreign-exchange andcommodities positions, whether or not in the trading accounts, and (ii) all significant price risks, including basis risks and directional market risks.The MMR also requires that all trading positions be incorporated in the daily VaR back testing requirement, which requires that daily net profit or loss from all trading positions be compared with the corresponding one-day total VaR model estimate. The SR Letter provides that MMR-subject Banking Organizations frequently review backtest results aspart of an overall risk management program, and maintain policies and procedures to follow inresponse to backtesting results. Other issues addressed in the SR Letter include: (i)appropriate update frequency for VaR lookback data;(ii) minimum requirements of annual independentreview of market-risk measurement and managementsystems; (iii) stress-testing expectations; and (iv)specific risk treatments for equity and creditportfolios, among others.
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Should you wish to receive further informationconcerning matters discussed in this BankingAdvisory, please contact Clemente Vazquez-Bello,Esq. at (305) 376-6082, Andres A. Fernandez, Esq.at (305) 376-6097 or Marina Olman, Esq. at (305)376-6069 or at [email protected],[email protected] or [email protected].
This Banking Advisory is for general informationonly. It is not legal advice, and legal counsel should be contacted before any action is taken which might be influenced by this Banking Advisory.
