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The Bottomline October The Bottomline Hong Kong Division October - December 2005 Issue Presidential Message Dear Members of CIMA and readers of Bottomline, • advised Headquarter on our negotiations with the HKICPA on mutual recognition arrangement. Season’s Greetings! In 2005 we have been visited by officers from our UK Headquarter I trust that you have already had a wonderful Winter Solstice and no less than seven times. This is on top of regular quarterly visits a very happy Christmas. As we walk into 2006 may I wish you a to the UK by our Area Representative, Past President Mr Kenneth prosperous new year with lots of exciting opportunities both in Chan. Kenneth was appointed Vice-Chairman of the International business and in personal development. Committee earlier this year. This is the first time that a member of the Hong Kong Division has been appointed to this position. This is Under the leadership of President Albert Law, 2005 has been as much a reflection on Kenneth’s personal achievements as it is on an eventful year for CIMA Hong Kong Division. In addition to the collective achievement of the Hong Kong Division. ‘business-as-usual’ activities the Council, with tremendous help from the Secretariat, organised many other activities to enhance the The Division and our UK Headquarters are very keen to enhance CIMA brand here in this part of the world and to further strengthen branding of the Institute in Hong Kong and Greater China in bonding amongst members : general, and to improve on the current support infrastructure to carry out this strategy in the region. You will hear announcements • divisional office moved to prestigious Jardine House on changes to regional governance and administration soon. All these are necessary for the continual promotion of the science • hosted lunch-hour seminar on strategic scorecard presented by of management accounting and the Chartered Institute of Bill Connell and Richard Marlett Management Accountants. Only when the market is fully aware in its own right will we management accountants have a market to • re-launched and held Council Away Day in Macau to formulate make our contributions. divisional strategy Enjoy the rest of the festive season and look forward to • hosted a one-day seminar on ‘Issues affecting corporate receiving your support in the coming year. performance’ in conjunction with Metro Finance Radio and supported by the Securities and Furtures Commission Yours in CIMA, • advised the Government in response to their call for professional Kingston Ho FCMA opinion on the formulation of the 2006 budget and funding of Vice President Financial Reporting Council CIMA Hong Kong division • launched the study-buddy group pursuant to actions agreed in Council Away Day The Bottomline 01 Market Risk Management What is Market Risk Management? By Karel Vacek arket Risk Management (MRM) is a special 2 million. Any excess over the limit gets promptly reported by the department of the financial institution which MRM department to the bank management and the excessive measures, monitors, controls and manages the position has to be closed immediately. price risk in the proprietary trading books. Basel M Committee stipulates that ‘a trading book consist of Any FX portfolio of a financial institution contains more than a positions in financial instruments and commodities held either with single foreign currency. The FX risk can be then calculated by trading intent or in order to hedge other elements in the trading variance-covariance matrix method. Let’s consider a portfolio of HKD book.’ In plain language we can say that proprietary books consist 100 million converted in EUR at the rate of 10.5 and HKD 55 million of financial instruments and commodities held for the own trading converted into GBP at the rate of 15.05. With 99% confidence level, account of the financial institution. The main market risk categories the daily volatility of GBP/HKD rate moves over the period of 1 year are FX risk, interest rate risk, equity risk, and derivatives risk. is approximately 1.27%. The correlation of EUR and GBP currencies is about 95%. The resulting VaR of the position is then square Let me explain the concept of the risk measurement on the FX risk. root of (1.3 x 1.3 + 0.70 x 0.70 + 2 x 0.95 x 1.3 x 0.70) = HKD When an FX trading department in a bank in Hong Kong anticipates 1.98 million. VaR of HKD 1.98 million is very close to the limit HKD that the euro currency will strengthen against the Hong Kong dollar, 2 million allocated to the FX trading department. Such high VaR it may purchase EUR say for the would result in warning issued by amount of HKD 100 million. the MRM department to the FX The amount gets converted into Basel Committe stipulates that “a trading book trading department and in alerting EUR at the rate say 10.50 which the bank management. translates into EUR 9,523,809. consist of positions in financial instruments and Should EUR indeed later commodities held either with trading intent or The major challenge in the Market strengthen to 10.60, the position in order to hedge other elements in the trading Risk monitoring is the access to can be closed with a profit of HKD book.” the up-to-date positions of trading 952,375 (ignoring the transaction departments and the real time costs). Should however the EUR monitoring of the market risk. decrease in value say to 10.35 (e.g. due to unexpected negative This requires significant infrastructure and system investment. If economical news from the Euro zone), the position may result in a the above monitoring is only done on the daily basis, any excessive loss (HKD 1,428,577). This is the point where the MRM Department positions cannot be spotted and reduced on the same day, but steps in. most likely on the next day. Therefore through understanding of the trading limits from the front office departments is an utmost First, MRM measures the risk. One of the common methods is priority. MRM department increases the risk awareness among the Value-at-Risk (VaR) number produced through a variance method. whole institution with particular focus on the critical front office The daily standard deviation of EUR/HKD rate moved over the period departments. of 1 year is about 0.56%. Usually, a confidence level of 99% is used, which means that the daily volatility of the FX rate is 2.33 x 0.56% (This article is written in a personal capacity and does not in any way = 1.30%. Therefore the position of HKD 100 million converted into represent the views if Mizuho Securities Asia Limited and/or Mizuho EUR carries VaR of HKD 1.3 million. The practical meaning of the Financial Group.) 99% confidence level is that a loss higher than the VaR number (so-called ‘outlier’) does not occur more often than once every 100 trading days. The loss in the example above is an outlier which Dr. Karel Vacek studied physics at the Charles needs further explanation by the MRM department. University Prague (MSc, RNDr. 1987, summa cum laude) and engineering at the Osaka Second, MRM department monitors all positions against the limit. University, Japan (PhD, 1994). Briefly worked in The limit is a maximum VaR which the FX department may hold nanotechnology as HI-VIPS researcher at Hitachi according to the bank management decision. In principle, this Ltd., Tokyo, Japan. From 1996, Karel has been decision should be approved at the highest level by the board. Let’s involved in financial markets as risk management consider that the bank has allocated to the FX department a limit professional, first with ING Bank Prague (1996- of HKD 2 million. Then the position which results in VaR of HKD 1.3 1997), later as Director, Head of Market Risk in million is within the mandate of the FX trading department. ING Barings Tokyo (till 2003) and in ING Bank Hong Kong (2003- 2005). From April 2005, Karel is Director, Head of Corporate Third, the controlling and managing function of MRM is executed Strategy with Mizuho Securities Asia Ltd. in Hong Kong. Member of when a large position is spotted; e.g. a position in EUR of equivalent Hong Kong Chapter PRIMA Steering Commitee, Hong Kong Institute HKD 200 million is not acceptable, in fact the resulting VaR of HKD of Directors and New York Academy of Sciences. Karel is fluent in 2.6 million would create an excess of 30 % over the limit of HKD Japanese, English and Czech. The Bottomline 02 Prestigious Certified Management Accountants of Canada, FCMA award is given to CIMA member Dr. Anthony CW Tam ACMA CIMA member Dr. Anthony Tam ACMA is only the third person manuals on Cost & Management Accounting. in Hong Kong to ever be awarded the Certified Management Accountants of Canada (CMA) FCMA award. The CMA Fellow Speaking to Dr Tam his career seems to move in phases of ten award cannot be applied for in the usual manner and is awarded years and at the time of our meeting, he was preparing for a at the discretion of the institute for services to accountancy and move to Department of Business Administration, IVE (Chai Wan) the institute. as the Head of the department. His final career move is at the moment planned to be move into horticulture. Walking into his Dr. Tam started his professional life as a pharmacist in Canada. office was like walking into a greenhouse. After speaking to friends he decided to make the switch If the condition of the plants in his office to accountancy and after completing his training moved to was any guide, I am sure his move into the Macau in 1983 to work at the University of Macau, where as cultivation of plants will be very successful.
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