Waha Capital Annual Report 2015

Risk Management in Capital Markets

The Capital Markets business faces a fundamentally different variety of risks to the Principal Investments business. While Principal Investments assets tend to be multi-year investments, Capital Markets investments are generally significantly shorter in tenure, and are therefore more significantly vulnerable to market volatility. We employ an extremely disciplined approach to risk management of the Capital Markets portfolios which are monitored on a continuous basis by the Risk Management team.

The main financial risks can be summarised as follows:

Financial Risks

Market risk

  • Market risk is the possibility that an asset/position will lose value due to a change in the price of the underlying instrument, a change in the value of an index of financial instruments, changes in various interest rates, and other risk factors.
  • This includes, in our case, interest rate risk, foreign exchange risk and macro credit risk.

Operational risk

  • Defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. These include legal and fraud risks in addition to risks related to trading and settlement errors. The management of these risks requires putting in place adequate procedures and operational controls.

Credit risk

  • The possibility of loss due to a counterparty’s or an issuer’s default, or inability to meet contractual payment terms.

Liquidity risk

Liquidity risk can be split into three categories:

  • Market liquidity risk

    The possibility that an instrument cannot be obtained, closed out, or sold at (or very close to) its economic value. As individual markets evolve, their liquidity will gradually change, but market liquidity can also fluctuate rapidly during periods of market stress.

  • Funding liquidity risk

    The risk that the funds will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs, without affecting either daily operations or the financial condition of the portfolio. This may be due to some specific market events such as the liquidity squeeze observed after the Lehman bankruptcy.

  • Refinancing risk

    The risk of not being able to replace maturing liabilities which may trigger a forced liquidation of assets.

Role of the Investment Committee

  • The Investment Committee approves investments proposed by the portfolio managers.
  • The Investment Committee reviews investment activity reports produced by the Risk Management team on a weekly basis (daily during periods of high volatility).
  • These reports (i) summarise all investment activity, (ii) clearly illustrate investment portfolio risk and return, (iii) evaluate the portfolio managers’ compliance with the investment policy and all risk limits, and (iv) list exceptions to internal policy and regulatory requirements.
  • The Investment Committee ensures compliance with internal policies and regulatory requirements.

Role of the Risk Committee

  • The Risk Committee exists to approve and amend new risk policies and meets when required.
  • The Risk Committee defines responsibilities of different parties in implementing the risk policy.
  • New policies or amendments are proposed by the risk manager after detailed discussions with the Risk Committee and Portfolio Management team members.
  • The implementation of approved risk policies are monitored on a daily basis by the Risk Management team.
  • Any breach of the Risk Management policy is reported following the action plan detailed in the related policy.