Market risks

Market risk is the risk of the Bank’s losses due to unfavourable changes in the market value of financial instruments in the trading portfolio or financial derivatives of the credit institution, as well as foreign currency and/or precious metals exchange rates.

The order of identification, analysis, evaluation, optimization and control of market risks are stipulated by the Regulations that set guidelines for transactions that are subject to such risks

Market risk includes stock exchange, foreign exchange and interest rate risks.

Stock exchange riskis the risk of losses due to unfavorable change in prices for stock exchange valuables (securities including those confirming managerial rights) in the trading portfolio and financial derivatives under the influence of factors related to the stock exchange valuables and financial derivatives issuer, or to the general fluctuations of market prices for financial instruments.

Foreign exchange risk is the risk of losses due to unfavorable change of foreign currency and/or precious metals exchange rates on positions opened by the Bank in foreign currencies and/or precious metals. In order to assess the risk which is related to maintenance of open positions in foreign currencies the Bank utilizes Bank of Russia methods determined in the Regulation dated 14.11.200 ¹ 313P “On the order of market risk calculation by the credit organizations”. In the process of currency risk assessment the assets quality in every currency and loan portfolio quality are taken into account.

The Bank manages currency risk by ensuring maximum possible consistency between the currency of its assets and the currency of its liabilities by currency within established limits. The Assets and Liabilities Management Committee sets limits on the level of exposure by currency and in total for both overnight and intra-day positions.

Interest rate risk is the risk of financial losses (damages) due to unfavourable changes in the interest rates on assets, liabilities and Bank’s off-balance instruments.

Main sources of the interest rate risk are:

• Maturity gap of assets, liabilities, off-balance claims and liabilities on instruments with the fixed interest rate;
• Maturity gap on assets, liabilities, off-balance claims and liabilities on instruments with the floating interest rate (interest rate restatement risk);
• Change of configuration of profitability curve on long and short positions of financial instruments of one issues inflicting losses due to exceeding of potential expenses over income upon closing of such positions (profitability curve risk);
• For financial instruments with the fixed interest rate in case of matching maturities — gap in the level of change of the interest rates on obtained and places resources by the Bank; for financial instruments with the floating interest rate on condition of the same floating interest rate restatement frequency — gap in the level of changes of the interest rates (basis risk).

Assessment of the Bank’s exposure to interest rate risk is managed upon gap analysis of financial instruments sensitive to changes in interest rates (SFI). The principal methodological approach of gap analysis within the framework of interest rate risk evaluation is recognition of future payment flows under SFI at carrying amounts. These carrying amounts are broken down by the earlier of contractual interest repricing or maturity dates.