Market risk is the risk of downward pressure on the Group’s financial results or its capital base due to adverse changes in the value of the Group’s assets/liabilities (claims/obligations) as a result of market conditions, i.e., risk factors.
VTB Group has a standing collective body within the Group Management Committee as part of its system for managing the Group’s consolidated assets and liabilities: the VTB Group Assets and Liabilities Management Committee (ALMC). The ALMC’s main objectives are:
- management of VTB Group’s assets and liabilities;
- management of VTB Group’s treasury risks;
- determining the principles for internal and external pricing within VTB Group;
- determining approaches to capital allocation within VTB group according to different types of risks;
- determining approaches to the redistribution of capital among VTB Group companies.
The Group’s Coordination Commission on Assets and Liabilities Management and Interaction with Financial Institutions under the ALMC has been in operation since 2017. Its main objectives are:
- ensuring the effective functioning of common Group principles, procedures and limits in terms of the management of assets and liabilities;
- ensuring effective interaction within the framework of intra-group rules for conducting business with financial institutions.
The Risk Management Committee sets operational and portfolio limits for market risk and distributes the risk appetite for the trading book among VTB Group members and business lines.
The Regulation on the Procedure for Managing Market Risk in VTB Group (hereinafter, the “Regulation”) establishes procedures for identifying and monitoring market risks, the structure and hierarchy of market risk limits from the level of VTB Group to the level of Group members and individual divisions, procedures for monitoring compliance with limits and restrictions and for responding in case they are exceeded, and it also specifies the procedure for preparing reports on the Group’s market risk.
Market risk is assessed and managed in the context of the following types of books:
- A trading book consisting of operations carried out in order to extract profits through their revaluation or hedging of other elements of the trading book;
- A portfolio of Treasury debt securities consisting of operations conducted by the Treasury Department and revalued at fair value.
A bank book consisting of interest-sensitive instruments that are revalued at amortised cost or instruments used to hedge elements of the bank book. Loans that do not pass the SPPI test are counted in the bank book.
Based on an analysis of VTB Group’s portfolio, the following areas of market risk can be identified:
- Interest-rate risk of the Bank’s book;
- Currency risk of the Bank’s book and the Treasury debt securities portfolio. Depending on the nature of the operations bearing currency risk, the Group’s entire currency position is attributed to either the Trading book or the Bank’s book;
- Market risk of the trading book and the Treasury debt securities portfolio.
Interest-rate risk of the Bank’s book
Interest-rate risk management is based on VTB Group’s bylaws and includes:
- Setting standard interest rates for deposits and internal rates for financing, taking into account current market conditions;
- Calculating interest-rate risk (ECap, etc.);
- Setting capital limits for covering the interest rate risk for the Group and individual banks;
- Establishing an indicator for the Bank book’s appetite for interest-rate risk – the signal value of the sensitivity of net interest income to a change in interest rates.
The main parameters used to assess interest-rate risk are:
- The sensitivity of the Group’s interest position to a change in interest rates, measured in terms of (1) the size of the reduction in the net present value of the interest position; and (2) the net interest income under an unfavourable change in interest rates, as well as a parallel movement of the yield curves by 100 and 400 basis points;
- The capital for covering interest-rate risk, measured by assessing reductions in the net current value of the Bank’s interest-rate position in the event of likely unfavourable interest-rate movements.
Currency risk of a structural open currency position
The Group uses internal regulations adopted by the Group’s Management Committee to manage its currency risk. It also ensures that the currency of its assets matches that of its liabilities and maintains an open currency position (OCP) in each of the Group’s banks within established limits, including internal OCP limits and the capital limit to cover the currency risk of structural OCP, as well as regulatory OCP limits.
Approved stress scenarios are used to calculate the capital required to cover VTB Bank’s currency risk stemming from structural OCP.
The following are the main parameters used to assess the currency risk of the Group’s structural OCP:
- Calculation of open currency positions in the context of individual currencies and VTB Group companies;
- Calculation of the OCP sensitivity to changes in foreign currency exchange rates of 1 RUB and 1%;
- Capital to cover the currency risk of structural OCP.
Market risk of trading operations
VTB Group is exposed to market risk regarding its trading book and its treasury debt securities portfolio associated with a negative revaluation of instruments due to changes in the values of various risk factors, including bond prices, stocks, commodity instruments, exchange rates, interest rates, credit spreads, risk volatility factors and correlations between them.
Although the treasury bond portfolio is separate from the trading book due to the different objectives in conducting transactions involving these portfolios, market risk management for treasury debt instruments is carried out in the same way as for the trading book.
To limit market risk within VTB Group, a set of limits is used. All limits can be divided into the following two groups: portfolio limits (VaR limits, stop-loss limits and stress limits) and operational limits that limit the concentration of individual indicators or types of assets in the portfolio (DV01, FX delta, etc.).
The Risk Department (since 20 November 2018, the Integrated Risk Management Department) performs the following market risk management functions for trading operations:
- evaluates and reports on the Group’s market risk profile, reviews the structure of limits and prepares proposals for reducing and managing market risk for the trading book and the treasury debt securities portfolio;
- monitors on a weekly basis compliance with Group market risk limits; local market risk limits are monitored by the risk divisions of subsidiary banks on a daily basis;
- informs business units on a weekly basis about compliance with Group limit discipline, provides the ALMC with a monthly report on compliance with limits.
The results of stress testing are used to assess the market risk of the trading book and the treasury securities portfolio. The methodology used to assess these risk metrics is submitted to the Risk Management Committee for consideration and is communicated to VTB Group companies.
Stress testing: the result of the revaluation of the Group’s trading book and Treasury debt securities portfolio is modelled on the basis of historical changes in risk factor values (observed under conditions of significant changes in macroeconomic indicators), as well as hypothetical changes in risk factors.
A scenario analysis showed that, in 2018, the greatest impact on market risk would have corresponded with a significant increase in risk-free rouble-denominated interest rates and the widening of credit spreads.
VaR: VaR is calculated based on the following parameters:
- historical period: two years;
- forecasting horizon: one trading day;
- confidence interval: 95%
- method used: historical modelling.