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SARON: Risk Management and Controls

SARON · Work through your exam, one topic at a time.

All guide sections

Risk Management and Controls

This domain tests how a SARON-driven book is measured, limited and hedged, and which control failures the examiner expects you to spot. Expect questions that combine interest rate risk in the banking book, basis risk, liquidity and hedge sizing.

Core risk types

  • Interest rate risk in the banking book: repricing gaps, net interest income sensitivity and economic value of equity under rate shocks, limit setting and independent model validation.
  • Basis and repricing risk: a compounded SARON asset funded fixed, reset lags, SARON versus term fixings, and convexity between futures and OIS forwards.
  • Liquidity risk: LCR and NSFR, intraday liquidity, repo rollover and haircut or margin-call risk on pledged collateral.
  • Counterparty and CCP risk: variation and initial margin, default fund contributions, and timing of margin calls.
  • Operational and model risk: benchmark transition, fallback operation, calculation errors, key-person dependency, and three-lines-of-defence testing.

Worked example

A CHF 50,000,000 fixed-rate position has modified duration 4.2. DV01 = 50,000,000 x 4.2 x 0.0001 = CHF 21,000 per basis point. One Three-Month SARON future (notional CHF 1,000,000) has DV01 = 1,000,000 x 0.25 x 0.0001 = CHF 25 per basis point. Hedge ratio = 21,000 / 25 = 840 contracts. Reasoning shown: duration converts notional into rate sensitivity, the future's quarter-year notional gives its own sensitivity, and the ratio equalises the two. Residual basis risk remains because the future tracks a quarterly average, not the exact asset repricing.

Traps

  • Attributing large duration to a SARON floating-rate note; its sensitivity runs only to the next reset.
  • Netting DV01 across fixed and floating legs without isolating basis risk.
  • Running stress tests with parallel shocks only, missing curve twists that hit repricing gaps.
  • Ignoring the liquidity cost of margin and haircuts in a stress scenario; collateral quality is a funding risk.
  • Assuming the transition to SARON removed fallback and operational risk; the fallback still has to be operated and tested.