Resolution No. 0509-98: Regulation for the Supervision of Market Risks

Lima, May 22, 1998
Resolution S.B.S.
No. 509-98
The Superintendent of Banking and Insurance
WHEREAS:
That, in accordance with Article 221 of the General Law of the Financial System and the Insurance System and Organic Law of the Superintendency of Banking and Insurance, Law No. 26702, companies in the financial system are empowered to carry out operations that are exposed to market risks; That said market risks may affect on- and off-balance sheet positions held by the aforementioned companies; That, consequently, it is necessary for this Superintendency to establish the regulatory framework for the supervision of said market risks; Having heard the opinion of the Deputy Superintendencies of Banking and Legal Affairs, as well as the Office of Economic Studies and Statistics, and, In use of the powers conferred by numerals 7 and 9 of Article 349 of the General Law; RESOLVES:
Article One.- To approve the Regulation for the Supervision of Market Risks, which is an integral part of this Resolution.
Article Two.- This Resolution shall enter into force on the day following its publication in the official newspaper El Peruano. Circular No. B-1971-95, F-314-95 of April 27, 1995 is hereby repealed.
Register, communicate and publish.
MARTÍN NARANJO LANDERER
Superintendent of Banking and Insurance

REGULATION FOR THE SUPERVISION OF MARKET RISKS
CHAPTER I
GENERAL PROVISIONS
Article 1.- Scope. 1
This Regulation shall apply to multiple-operation companies that carry out operations subject to market risks and to the Financial Development Corporation (COFIDE), hereinafter companies.
Article 2.- Definitions.
For the application of this Regulation, the following definitions shall be considered:
a) Market risk: Risk of having losses in on- and off-balance sheet positions derived from movements in market prices. This includes risks pertaining to instruments related to interest rates, foreign exchange risk, share prices, commodities and others. b) Commodities: Primary or basic merchandise consisting of physical products that can be exchanged in a secondary market, including precious metals but excluding gold, which is treated as a currency. c) Market risk management: The process consisting of measuring, monitoring, controlling and reporting the market risks faced by the company. d) Business areas: The various units of the company that take risks, such as the credit unit, treasury and others. e) Registration area: The unit responsible for accounting processing and verification of the information used by the business areas.
Article 3.- Responsibility of companies.
Companies must adequately identify and manage the market risks they face. In this regard, it shall be the responsibility of the Board of Directors or equivalent body to establish and comply with policies and procedures to appropriately identify and manage the market risks faced by the company. This responsibility includes compliance with the provisions contained in this Regulation.
CHAPTER II
REQUIREMENTS FOR THE IDENTIFICATION, MANAGEMENT AND CAPITAL ALLOCATION OF MARKET RISKS
Article 4.- Minimum requirements.
For the identification, management and capital allocation of market risks, companies must comply with the following minimum requirements:
a) Organization, functions and responsibilities delimited. b) Risk committee. c) Risk unit. d) Policy and procedure manuals. e) Suitable officials and professionals. f) Reports and submission of information. g) Methods for measuring market risks and complementary analyses.

1
Article amended by Resolution SBS No. 168-2004 of 02/03/2004 (COFIDE has a 3-month adaptation period from the issuance of said Resolution to adapt to the Regulation for the Supervision of Market Risks)

h) Mark-to-market registration. i) Limits per exposure to market risks. j) Adequate computer systems. k) Allocation of effective capital.
Article 5.- Organization, functions and responsibilities delimited.
Companies must establish the organization scheme, as well as define and delimit the functions and responsibilities of the areas involved in carrying out operations subject to market risks.
Article 6.- Risk Committee.
The Risk Committee shall be responsible for designing and establishing the policies and procedures for the identification and management of market risks; this function includes the establishment of exposure limits to which positions subject to market risks are subject. Likewise, the Committee must establish effective communication channels so that the areas involved in taking, registering, identifying and managing market risks are aware of the risks assumed. The Committee shall have as members, at least, a director, the general manager and the head of the Risk Unit.
Article 7.- Risk Unit.
The Risk Unit of the company shall be responsible, among others, for verifying compliance with the policies and procedures established by the Risk Committee. The Risk Unit must be independent of the business areas and the registration area.
Article 8.- Policy and procedure manual.
Companies must have policy and procedure manuals regarding the conduct of operations subject to market risks, which shall also establish the organization scheme, functions and responsibilities of the areas involved. Likewise, the Risk Unit must have policy and procedure manuals that include the mechanisms used by the company for proper identification and management of market risks. Such manuals must be available to the Superintendency.
Article 9.- Suitable officials and professionals.
The officials responsible for the areas involved in carrying out operations subject to market risks and the professionals that comprise them, including the Risk Unit, must have, as appropriate, adequate training, knowledge and experience.
Article 10.- Reports and submission of information.
The Risk Unit of the companies must submit to this Superintendency the reports they prepare for the identification and management of the market risks they face and all information that this Superintendency requests in due course.
Article 11.- Mark-to-market registration.
Companies must register, daily and at market value, positions in all kinds of temporary or negotiable financial investments, in derivative financial instruments and others subject to market risks. In the event that during a certain period of time a position cannot be registered at its market value, an approximate market value must be used. These records must be duly documented and available to this Superintendency.
Article 12.- Measurement and valuation methods.
The Risk Unit must use appropriate methods to measure and value the positions subject to market risks faced by the company. The aforementioned Unit must also include, in risk measurements, the respective back-testing and worst-case scenario analyses to evaluate the adjustment and forecasts of internal models. The Risk Committee must establish policies and contingencies for the results of the back-testing and worst-case scenario analyses. Back-testing consists of comparing, for a given period, the losses estimated by market risks with the results actually generated. Meanwhile, the worst-case scenario analysis consists of choosing the most adverse price movement in a day, within a selected period, and applying this set of prices to current positions.
Article 13.- Limits per exposure to market risks.
The Risk Committee of the companies must establish internal limits per exposure to market risks of positions in all kinds of temporary or negotiable financial investments, including those in derivative financial instruments. Such limits shall be established by type of financial instrument and by type of market risk and must consider, among other factors, the accumulated losses during a period of time.
Article 14.- Adequate computer systems.
Companies must have adequate computer systems for the identification and management of the market risks faced by the company, as well as appropriate security mechanisms for them.
Article 15.- Capital requirements.
The allocation of effective capital to cover market risks shall be made in accordance with the standardized method that this Superintendency establishes in due course.
CHAPTER III
EXTERNAL COLLABORATORS
Article 16.- Internal Audit.
The Internal Audit Unit must evaluate compliance with the policies and procedures established by the company for carrying out operations subject to market risk, with the policies and procedures established by the Risk Committee for the identification and management of the market risks faced by the company, as well as with the provisions of this Regulation. Such evaluation must be included in the permanent activities of the Annual Internal Audit Plan and must produce the reports and recommendations derived from said evaluation.
Article 17.- External Audit.
External Auditors shall include in their annual opinions an opinion on the reasonableness of the financial registration of operations subject to market risk and shall determine whether said registration adequately reflects the market risks faced by the company.
Article 18.- Risk Rating Agencies.
In the rating process, risk rating agencies must evaluate the market risks faced by companies as well as the mechanisms implemented for the identification and management of such risks.
CHAPTER IV
FINAL AND TRANSITIONAL PROVISIONS
Article 19.- Authorization to operate with derivatives.
To carry out operations with derivative financial instruments, companies must follow the procedures established in Article 283 and in the last paragraph of numeral 3 of Article 290 of the General Law, as applicable. The application submitted to this Superintendency must refer, at least, to the implementation of the requirements established in Chapter II of this Regulation and numeral 2 of Article 223 of the General Law, and attach a certified copy of the resolution of the Board of Directors or equivalent body.
Article 20.- Risk Committee.
The functions of the Risk Committee may be assumed by the Executive Committee, the Asset and Liability Committee or any other Committee that meets the characteristics established in the last paragraph of Article 6.
Article 21.- Capital requirements.
The capital requirements in accordance with Article 15 of this regulation shall begin to be implemented gradually as of December 31, 1998.
Article 22.- Minimum contract requirements.
Companies may enter into agreements among themselves to establish minimum conditions for the contracts they use when carrying out operations with derivative financial instruments.
Article 23.- Adaptation Period.
For the application of this Regulation, companies shall have a maximum adaptation period that will expire on December 31, 1998.