PASHA Bank

The management of market risks at the Bank is based on the principle of differentiation between sources of market risks, liability for the risks being assumed, limitation of potential losses and centralization of market risks management.

The Bank organizes the system of market risks management with the following purposes:
- to avoid potential losses as a result of market fluctuations;
- to observe the requirements of the Central Bank of the Azerbaijan Republic regarding the assurance of the Bank’s financial stability;
- to ensure that the Bank’s legitimate interests and its customers are met when operating with market instruments.

The key objectives behind the establishment of a system of market risks management are as follows:
- to establish control over the diversification of commercial portfolios;
- to maintain the Bank’ open positions at a level not threatening its financial position.

In accordance with the principle of risk differentiation, each responsibility center carries the market risks characteristic only of a specific business. This principle enables effective distribution of limits and operational control over their use.

The Board of Directors determines the list of subdivisions authorized to carry out operations on external markets and open positions.

In accordance with the principle of limitation of losses, the total volume of limits established by the Board of Directors (including limits on open foreign exchange position) must not exceed the regulations established by the Central Bank of the Azerbaijan Republic. The Bank also carries out analytical research to limit the level of market risks and can establish limits based on the results of such analysis.

In accordance with the principle of liability for risk, the departments authorized to carry out operations associated with market risks are responsible for efficient use of such authority.

In accordance with the principle of centralization of management of market risks, all information on transactions affecting the Bank’s open positions (including open foreign exchange position), as such operations are carried out, is delivered to the Financial Management Department for intraday control of positions and forecast of positions at the end of a business day.

The methods of market risk management depend on the nature of arising risks and are divided as follows:
- general, i.e. applicable to all risks considered as market risks (i.e. currency, interest, stock);
- special, i.e. applicable only to specific risks or financial instrument (commercial portfolio).

System on the management of currency risks

The management of currency risks is related to structural methods of management. The following are subject to currency risk management:
- general open foreign exchange position of the Bank;
- sub-positions:
--- investment open foreign exchange position of the Bank;
--- commercial positions.

The key instruments of control over currency risks are:
- unified currency rate policy;
- system of control over open foreign exchange positions.

System on the management of interest risks

Interest risks may emerge both in connection with assets and liabilities. The following are key instruments of interest risks management:
- unified policy on the establishment of interest rates;
- control over GAP.

The Bank pursues a unified interest rates policy considering internal and external factors. External factors include the value of market interest rates for a certain type of instruments. Internal factors include the ratio of the Bank assets and liabilities by rates and maturity, and determination of gaps.

System on the management of stock risks

The system of limits is the key instrument of stock risks management. The following system of stock market limits is used by the Bank:
- limit for the issuer of securities;
- limit for the share of securities in commercial and (or) investment portfolio;
- limit for uniform financial instruments;
- stop loss limits.

The system of limits is an integral part of the risk management system and is supported by relevant internal regulations defining a procedure for establishing limits, their types for specific instruments, as well as the authority and responsibility of involved departments.

System of control over market risks management efficiency

Control of the efficiency of market risks management is exercised on several levels. The Bank’s Board of Directors exercises overall control over market risks, establishes the list of instruments containing market risks, limits on them, and control over their execution, makes decisions on regulating the commercial portfolio in the event of sudden fluctuations of market prices or other abrupt changes of the market environment.

The Committee on the management of assets and liabilities ensures a uniform policy with regard to interests and exercises control over it.

The Department of financial management exercises current control over the level of market risks, manages and re-distributes sub-limits within the commercial portfolio, analyzes the market environment and forecasts levels of market risks.

The accounting and reporting department exercises control over the observance of requirements of the Central Bank of the Azerbaijan Republic with regard to market instruments, including the value of open foreign exchange position and the amount of market risks covered by the Bank’s capital; accumulates and processes the information submitted to the Central Bank of the Azerbaijan Republic, exercises operational control over the formation and change of structure of the commercial portfolio, compliance with the limits established and implementation of transactions.

The middle office exercises control over the total amount of limits, including limits on open foreign exchange position, control over current observance of limits, initial check of ticket compliance with the terms of the deal.

The risk management department carries out efficiency checks of the risk management system or its individual elements in accordance with its action plan or upon request of the management; including checks on the classification of the elements of estimated reserve base against potential losses, completeness of reserves, observance of limits.

The risk management committee regularly assesses the adequacy of market risk levels established, develops measures to improve the system of market risks management and reports to the Supervisory Board on the level of the Bank’s market risks.