Hong Kong’s Financial Regulators Crack Down on Risk Assessment and Auditing in Finance Sector

In an effort to ensure good governance and mitigate potential losses, Hong Kong’s financial regulators are stepping up their game when it comes to auditing and risk assessment in the finance sector. The Hong Kong Monetary Authority (HKMA) has established a robust framework for monitoring and managing risks associated with the Exchange Fund, which is responsible for overseeing the city’s financial markets.

Risk Management Framework

The HKMA’s Risk and Compliance Department plays a crucial role in this effort, working independently of front office functions to monitor the risk exposure of the Exchange Fund and assess compliance with established guidelines. The department reports directly to the Chief Executive of the HKMA, ensuring that any identified breaches are promptly reported and followed up on.

Key Areas of Focus

Credit Risk

• The HKMA has implemented an internal credit exposure policy to ensure compliance with the credit requirements of the Exchange Fund.
• This framework sets out the credit risk management framework for investment activities, aimed at minimizing potential losses.

Market Risk

• The HKMA uses a Value-at-Risk (VaR) methodology to measure and monitor market risk.
• Stress tests are conducted regularly to identify potential vulnerabilities, while the tracking error against the limit endorsed by the Exchange Fund Advisory Committee is closely monitored to prevent excessive market risk-taking.

Liquidity Risk

• The HKMA has implemented various internal investment restrictions to ensure sufficient liquidity in the Exchange Fund’s assets.
• The majority of investments are made in liquid financial markets and instruments that can be readily realized.

Operational Risk

• The HKMA has formalized an operational risk management framework that includes identification and monitoring of key risk indicators and reporting to senior management on operational risk profiles.

Long-Term Growth Portfolio (LTGP)

The LTGP is subject to rigorous risk assessment and auditing, with measures in place to manage investment risks at the aggregate level. The target asset allocation of LTGP is determined concurrently with other asset classes, taking into account prudent risk management principles and portfolio diversification strategies.

Risk Assessment Process

• Independent business risk assessments are performed by the Risk and Compliance Department on each investment proposal, including due diligence on partners, investment teams, and financials.
• Post-investment monitoring is an ongoing process, with regular reviews of matters such as capital calls, risk concentration issues, and compliance with investment agreements.

Conclusion

The HKMA’s robust approach to auditing and risk assessment in finance is a testament to the city’s commitment to maintaining a stable and secure financial system. By focusing on credit risk, market risk, liquidity risk, and operational risk, Hong Kong’s financial regulators are ensuring that the finance sector operates with integrity and transparency.