Statement of Guidance - Interest Rate Risk Management

Summary

This is a CIMA Statement of Guidance that explains how bank licensees are expected to comply with Rule 4(B) on interest rate risk, which requires them to have comprehensive risk management processes to identify, measure, monitor and control interest rate risk. It sets out CIMA's expectations for board and senior management oversight, risk management policies and procedures, risk measurement and reporting systems, and internal controls relating to interest rate risk.

• Scope: Applies to banks licensed by CIMA (referred to as licensees).
• Governance structure: Describes how boards of directors, senior management and independent risk functions should be structured and should operate to manage interest rate risk, including separation of duties between risk control and position-taking functions.
• Larger or complex banks: Additional expectations apply for larger or more complex banks to have a dedicated independent risk unit.
• Reporting requirement: Banks must report interest rate risk exposure in Schedule B of the BS Form, based on the shorter of the residual maturity or next repricing date.
• Financial statement treatment: Financial statements should follow IAS39 for reporting derivatives.

The document references the Basel Committee's January 2001 paper on interest rate risk management as the basis for the guidance and suggests it as a further resource, but does not itself impose new legally binding rules beyond elaborating on Rule 4(B).

Key obligations

• Senior management must ensure the bank's business structure and level of interest rate risk assumed are effectively managed, with appropriate policies, procedures and resources in place to control and limit interest rate risk.
• Banks should ensure adequate separation of duties between risk measurement/monitoring/control functions and position-taking functions, with risk exposures reported directly to senior management and the board.
• Larger or more complex banks should have a designated independent unit responsible for interest rate risk measurement, monitoring and control.
• Banks should identify risks inherent in new products/activities and subject them to adequate procedures and controls before introduction; major hedging or risk management initiatives should be approved in advance by the board or a delegated committee.
• Banks should measure vulnerability to loss under stressful market conditions and factor results into policies and limits for interest rate risk.
• Banks must provide timely reports on interest rate exposures to the board, senior management and, where appropriate, business line managers.
• Banks must report interest rate risk exposure in Schedule B of the BS Form, using the shorter of the residual maturity or next repricing date.
• Bank financial statements should adhere to IAS39 in reporting derivatives.
• Banks should maintain an adequate system of internal controls over interest rate risk management, including regular independent reviews, and make review results available to relevant supervisory authorities.

Applies to

banks, licensees