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Compliance Risk Management in Hong Kong: HKMA’s Proactive Approach
The Hong Kong Monetary Authority (HKMA) has implemented a robust risk management framework to ensure that its Exchange Fund operates within good governance principles. At the heart of this framework is the Risk and Compliance Department, which plays a critical role in monitoring the fund’s exposure to various risks and ensuring compliance with established guidelines.
Independent Oversight
The Risk and Compliance Department operates independently of front office functions, providing an added layer of oversight. This independence enables the department to conduct thorough assessments of the Exchange Fund’s investment activities, identify potential breaches, and report on any irregularities.
Key Features of Independent Oversight
- Conducts thorough assessments of investment activities
- Identifies potential breaches and reports on irregularities
Credit Risk Management
The HKMA has developed a comprehensive credit exposure policy that outlines the framework for managing credit risk in the Exchange Fund’s investment activities. This policy ensures that the fund’s investments comply with its established credit requirements, thereby mitigating potential losses.
Key Features of Credit Risk Management
- Comprehensive credit exposure policy
- Ensures compliance with established credit requirements
Market and Liquidity Risks
To manage market risk, the HKMA employs a Value-at-Risk (VaR) methodology, which provides an estimate of potential losses over a specific time horizon. Regular stress tests are also conducted to ensure that the Exchange Fund remains within its risk limits. In addition, the fund’s liquidity risks are managed through internal investment restrictions.
Key Features of Market and Liquidity Risk Management
- Value-at-Risk (VaR) methodology
- Regular stress tests
- Internal investment restrictions
Operational Risk
The HKMA has formalised an operational risk management framework, which includes identifying and monitoring key risk indicators. This framework enables the department to assess the operational risk profile of the Exchange Fund and report on any potential vulnerabilities.
Key Features of Operational Risk Management
- Identifies and monitors key risk indicators
- Assesses operational risk profile
Long-Term Growth Portfolio (LTGP)
The investment risks associated with LTGP are managed through a range of measures, including asset class approval, allocation limits, and general partner exposure limits. The Risk and Compliance Department performs independent business risk assessments of investment proposals.
Key Features of LTGP Management
- Asset class approval
- Allocation limits
- General partner exposure limits
- Independent business risk assessments