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management process. testing, which counts the number of days when daily trading
losses exceed the corresponding VaR estimate.
MarK-tO-MarKet (MtM)
The marking-to-market technique establishes historical Inputs Outputs
profit and loss by revaluing money market exposures to
prevailing market prices. When no market prices are avail-
able for a specific contract period, mark-to-model is used
to derive the relevant market prices. It is the Bank’s policy to Model
revalue all exposures categorized under the securities trad-
ing portfolio on a daily basis. As a general guide, marking to
market is performed independently of the trading unit i.e. Confidence
Level
prices/rates are obtained from external sources.
Result of
vaLue at rISK (var) Positions Backtest
Risk of losses arising from future potential adverse move-
ments in market rates, prices and volatilities are measured
using a VaR methodology. VaR, in general, is a quantitative Market
Data
measure of market risk that applies recent historic market
conditions to estimate the potential future loss in market Backtest
value that will not be exceeded in a set time period and at a Procedure
set statistical confidence level.

VaR provides a consistent measure that can be applied
across trading businesses and products over time and can The standard for back testing is to measure daily losses
be set against actual daily trading profit and loss outcome. against the VaR measurement assuming a one-day hold-
To assess their predictive power, VaR models are back test- ing period and a 99% level of confidence. The green zone of
ed against actual results. four or less exceptions over a 12-month period is consis-
Access Bank uses an internal VaR model based on the his- tent with a good working VaR model. Back testing reports
torical simulation method. 300 days of historical price and are produced regularly.
rate data is applied and updated daily. This internal mod-
el is used for measuring value at risk over both a one-day STRESS TESTING
holding period at a 99% confidence level. This model covers A consistent stress testing methodology is applied to trad-
general market (position) risk across all approved interest ing and non-trading books. The stress testing method-
rate and foreign exchange products. ology assumes that scope for management action would
be limited during a stress event, reflecting the decrease in
There are a number of considerations that should be taken market liquidity that often occurs.
into account when reviewing the VaR numbers including;
Losses beyond the confidence interval are not captured
• Historical simulation assumes that the past is a by a VaR calculation, which therefore gives no indication of
good representation of the future. This may not the size of unexpected losses in these situations. Market
always be the case. Risk complements the VaR measurement by regular stress
• The assumed time horizon will not fully capture testing of market risk exposures to highlight the potential
the market risk of positions that cannot be closed risk that may arise from extreme market events that are
out or hedged within this time horizon. rare but plausible.
• VaR does not indicate the potential loss beyond
the selected percentile. Stress testing is an integral part of the market risk man-
• Intra-day risk is not captured. agement framework and considers both historical market
• Prudent valuation practices are used in the VaR events and forward-looking scenarios. Stress testing pro-
calculation when there is difficulty obtaining rate vides an indication of the potential size of losses that could
and price information. arise in extreme conditions. It helps to identify risk concen-
• To complement VaR, stress testing and other trations across business lines and assist senior manage-
sensitivity measures are used. ment in capital planning decisions.

BACK TESTING The Bank performs two main types of stress and scenar-
The VaR model is an important market risk measurement io testing. First, risk factor stress testing, where extended
and control tool and consequently the performance of the historical stress moves are applied to each of the main risk
model is regularly assessed for continued suitability. The categories, which include interest rate, equity, foreign ex-
main approach employed is a technique known as back change, commodity and credit spread risk. Secondly, the

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Annual Report & Accounts 2017