Market Risk
Domain focus
Market risk questions cover trading-book boundary, VaR and sensitivity limits, independent market risk oversight, backtesting, and capital under the Standardised Approach or approved internal models.
Core rules
- BNM's market risk guidance expects board-approved limits, daily independent reporting, and a clear trading-book/banking-book boundary policy.
- The trading book holds positions for short-term resale or hedging; it must be marked to market with prudent valuation adjustments.
- VaR is a statistical loss estimate at a confidence level and horizon; it is not a worst-case loss. Backtesting compares VaR with actual P&L; exceptions trigger supervisory and capital responses.
- Interest rate risk in the banking book (IRRBB) is managed separately, using EVE and NII sensitivities.
- Standardised capital covers general market risk and specific risk for interest rate, equity, FX and commodity exposures.
Worked example
A trading position is RM100m, daily volatility 1%, 99% confidence (z = 2.33). Parametric VaR = 100m × 1% × 2.33 = RM2.33m. If the bank reports 8 backtesting exceptions in 250 days, that is a higher Basel zone and the capital multiplier rises; the bank must investigate model performance, not just report the number.
Traps
Do not equate VaR with maximum loss. Do not ignore liquidity horizons. Do not mix banking-book positions into trading VaR. Do not forget specific risk. Do not assume a model is approved just because it is used internally.