XN000022-1994-08-01 — Page 2

MONDAY, AUGUST 1, 1994

RISK MANAGEMENT OF FINANCIAL DERIVATIVE ACTIVITIES

THE HONG KONG MONETARY AUTHORITY TODAY (MONDAY) ISSUED TO THE TWO INDUSTRY ASSOCIATIONS FOR COMMENT A GUIDANCE PAPER PRODUCED BY THE BASLE COMMITTEE OF BANKING SUPERVISION ON THE MANAGEMENT OF RISKS INVOLVED IN FINANCIAL DERIVATIVE ACTIVITIES.

THE BASLE COMMITTEE BELIEVES THAT THE ESSENTIAL ELEMENTS OF A SOUND RISK MANAGEMENT SYSTEM SHOULD INCLUDE THE FOLLOWING:

AWARENESS AND PROPER UNDERSTANDING BY MANAGEMENT OF THE MARKET AND CREDIT RISKS INVOLVED IN DERIVATIVES.

APPROPRIATE OVERSIGHT BY BOARDS OF DIRECTORS AND SENIOR MANAGEMENT.

CONTINUOUS MONITORING, REVIEW AND CONTROL OF THE RISKS INVOLVED.

RELIABLE MANAGEMENT INFORMATION SYSTEMS WHICH PROVIDE TIMELY REPORTING TO SENIOR MANAGEMENT; AND

COMPREHENSIVE INTERNAL CONTROL AND AUDIT PROCEDURES.

AND PAPER,

"THE BASLE INTERNATIONAL ORGANISATION OF SECURITIES

THE A

A SIMILAR PAPER ISSUED BY

COMMISSION, REPRESENT

SUPERVISORS GLOBAL CO-ORDINATED INITIATIVE BY BANKING AND SECURITIES TO PROMOTE BETTER RISK MANAGEMENT OF FINANCIAL DERIVATIVE ACTIVITIES," THE EXECUTIVE DIRECTOR (BANKING SUPERVISION), MR ALBERT CHEOK, SAID.

IN

"RECENT YEARS HAVE SEEN BANKS IN HONG KONG BECOMING MORE ACTIVE

DERIVATIVE FINANCIAL

ACTIVITIES, SUCH AS

SWAPS AND FUTURES,

OPTIONS.

WHILE FINANCIAL DERIVATIVE

AN

ADDITIONAL

ACTIVITIES COULD PROVIDE

AN FOR HEDGING RISKS AS WELL AS PROVIDE ADDITIONAL TOOL SOURCE OF BUSINESS, IT COULD ALSO BRING ADDED RISKS TO BANKS.

"THE GUIDANCE OFFERED BY BASLE PROVIDES AN INDICATION MINIMUM STANDARDS WHICH BANKS SHOULD MEET IN THE MANAGEMENT

ARISING FROM FINANCIAL DERIVATIVE ACTIVITIES, EXPOSURES SAID.

OF THE OF RISK MR CHEOK

THE HONG KONG ASSOCIATION OF BANKS AND THE DEPOSIT-TAKING COMPANIES ASSOCIATION HAVE BEEN ASKED TO COMMENT BY SEPTEMBER 15.

A REFLECTING

COMMON SUPERVISORY

THE INTEREST, AUTHORITY WILL ALSO BE CONSULTING WITH THE SECURITIES COMMISSION.

AND

MONETARY FUTURES

FOLLOWING THESE CONSULTATIONS, THE MONETARY AUTHORITY CONSIDER HOW AND TO WHAT EXTENT THE BASLE PAPER SHOULD FORM THE FOR FORMAL

FOR AUTHORISED INSTITUTIONS ON THE GUIDELINES MANAGEMENT OF THEIR FINANCIAL DERIVATIVE BUSINESS.

/COPIES OF

WILL

BASIS

RISK