Camino a Santa Teresa # 1040 8o. piso, Col. Jardines en la MontañaDelegación Tlalpan, C.P. 14220, México D.F.

Tel. +52 (55) 3000-2608 y 3000-2548 www. consar.gob.mx

Comisión Nacional del Sistema de Ahorro para el Retiro

Session II: Risk Identification and Focus and Risk Indicators

Risk Identification in practice

Thursday 8th September, 2011, Lima - Peru

PENSION FUNDS (AFORES) Internal Architecture

Investments Unit

Independent and central risk management Unit

Compliance Officer

(ensuring observance of

all the regulations)

Investment Commitee

Risk Management

Commitee

2

Accounting Dept

Legal Dept

Operation Dept

Comercial Dept

Back Office

Board of Directors

C.E.O.

Shareholders

Invest

ment

manag

emen

t

proced

ure

manua

l. Risk

manag

eme

nt

proced

ure

manua

l

Prospe

ctu

s

Indep

ende

nt

Expe

rt.Ind

epen

dent

Couns

elor.

Indep

ende

nt

Couns

elor. • Self- correction

programs

• monthly

Reports

Indep

ende

nt

Boar

d m

embe

r

Minutes of committee

CONSAR has different methods and processes for identifying risks within a pension fund

Comercial Dept

- Corporate governance defined in regulation must operate efficiently and fulfill the responsibilities entrusted to it.- The manuals describe prudential measures, internal processes, best execution practices, etc.- A prestigious independent expert must evaluate once a year, processes and models of the Specialized Risk Management Unit- The Compliance Officer, through “Self- correction programs” reported failures of regulation and is responsible for following up.With this AFORES achieves a 75% discount on the amount of sanction.

3

Supervision Process runs on daily basis.

SUPERVISION PROCESSAFORES

CONSAR(DATABASE)

• INDEVAL• LOCAL CUSTODY• INTERNATIONAL CUSTODY

SUPERVISION(DATABASE)

Characteristics of instruments

Prices Risk Factors

• PRICE VENDORS.• VALUATION AGENTS.• INFORMATION SYSTEMS.

Surveillance System

RiskWatch

Riskwatch System

Risk Analysis System

Analysis and Reporting

Workflow System

- Regulatory non compliance- Advices.- Sanctions

(IN

SPEC

TIO

N) In due time and

proper form

Preserved without modification for legal

support.

• Sell/ Buy activityOn daly basis (Before 18hrs)•Siefores’ asset holdings.•Accounting (Financial Statement, Cash flows, balance sheets.•VaR Scenarios• Derivative holdings.

• Note decompositions

Transmits information

http://www.consar.gob.mx/normatividad/pdf/normatividad_emitida/circulares/Compilacion_19-8_19-9_19-10_y_19-11.pdf

Riskwatch System

-Stress Tests-What if analysis-Credit Risk

-Curve Shift-FX Shocks-Liquidity Risk

-Monte Carlo VaR-Historical VaR- VaR Contribution

Mexico's economic crisis of 1994 was the last and most recent crisis in the country of global implications.

X = 100%94%

29%21% 19%

13% 12%2%

0%10%20%30%40%50%60%70%80%90%

100%

Mexican Crisis1994

Russian Crisis1998

Máximo Drawdown

(22-oct-2008)

Asian Crisis1997

+100 PBS -5% inflationSeptember 11

2001

-5% MXPUSD

TEQUILA EFFECT BASE INDEX (100% = Tequila effect)

In the period from 15 to 30 December 1994 the rate Cetes 28 days rose from 13.75% to 31%, the exchange rate peso-dollar exchange rose from 3.4606 to 4.995 and later reach levels per dollar of 7.2 and stabilized at 6 pesos on average

5

Example

Siefore B1 B2 B3 B4 B5 SISTEMABonos Guber. a tasa fija 41.0% 27.7% 31.3% 23.3% 25.8% 29.8%Renta Variable Nacional 0.0% 32.0% 27.4% 32.5% 31.5% 24.7%Renta Variable Extranjera 0.0% 15.4% 17.3% 20.1% 15.0% 13.5%Derivados FX y tasas 10.0% 7.4% 14.6% 14.4% 19.7% 13.2%Bonos Guber. A Tasa Real 29.8% 8.4% 6.1% 6.8% 5.5% 11.3%Deuda Privada Nacional y otros 17.8% 9.4% 4.9% 3.7% 4.3% 8.0%Deuda Extranjera 4.3% 1.6% 1.2% 1.2% 0.7% 1.8%Bondes182, BPA182 0.8% 0.0% 0.0% 0.0% 0.0% 0.2%Cetes 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%IPAB 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Bursatilizados 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Revisables BANXICO 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Efectivo -0.4% -0.1% -0.1% -0.2% -0.4% -0.2%UMS -3.2% -1.8% -2.8% -1.9% -2.0% -2.3%TOTAL VaR 100% 100% 100% 100% 100% 100%

Another complementary tool is the value at risk contribution

Contribution to Value at Risk (Base 100 by type of Siefore)

6

Example

The marginal VaR for derivatives represents the amount of risk that derivatives will add to the portfolio

Siefore Básicas 1 Básicas 2 Básicas 3 Básicas 4 Básicas 5AFORE 1 0% 0% 0% 0% 0%AFORE 2 0% 0% 0% 0% 0%AFORE 3 0% 0% 0% 0% 0%AFORE 4 11% -4% -2% 6% -4%AFORE 5 0% 1% 4% 3% 6%AFORE 6 7% 7% 8% 9% 16%AFORE 7 2% 8% 9% 23% 18%AFORE 8 18% 3% 18% 23% 33%AFORE 9 17% 12% 23% 23% 29%AFORE 10 8% 12% 14% 32% 46%AFORE 11 0% 21% 26% 38% 46%AFORE 12 10% 21% 22% 34% 52%AFORE 13 37% 31% 25% 30% 35%AFORE 14 18% 28% 38% 51% 62%AFORE 15 29% 50% 56% 54% 57%SISTEMA 12% 18% 26% 34% 42%

(Total VaR)

Derivatives

(VaR without derivatives)

-

( A )

( B )

( A ) – ( B )

( A )

If (B) is greater than (A) means that derivatives help reduce the risk.

=

Example

Surveillance System

Rgimen de Inversin

Contabilidad

• Verifies Investment Regime fulfillment, valuation and accounting records.

Investment Regime

Financial accounting validations

To validate more than 2,000 instruments in 187 funds takes approximately two hours

Risk Analysis System

Rgimen de Inversin

Contabilidad

• Performance Contribution

• Daily gains and losses• Asset Allocation Reports• Historical Analysis• Diversification Reports• Relevant Trades

(outliers)• Inflows and Outflows.• Risk Measures (WAM,

Durations, Maximum Drawdown

• , etc)• Liquidity Reports• Credit Reports• Sectorial Reports• Net Return Indexes• Etc.

Inspections (Prudential reviews on-site)

Rgimen de Inversin

Contabilidad

2. Corporate Governance 3. Compliance

Officer4. Back Office and Treasury

5. Independent and central risk management Unit

1. Investments Unit

Inspector focuses on problems or vulnerabilities of each AFORE.

Risk

Identification Actio

ns to

redu

ce ri

skAnalysis &

Risk Scoring Update

Inspections (Prudential reviews on-site)

The topics reviewed and the depth of the in-situ inspection vary in each case depending on

The profile of the Afore The size and complexity of its operations Previous problems or weaknesses identified Qualifications of its operators Failures detected through the daily surveillance of portfolios.

 

If a weakness is identified and a recommendation is emitted and depending on the seriousness of the breach

Functionaries and/or operators may be removed Investment authorizations in specific instruments may be

revoked Even the license to operate may be revoked. Legal action may be taken

CONSAR has different methods and processes for identifying risks within a pension fund

-Inspections

-Surveillance System

-Quantitative Risk Analysis

-Independent Expert

Reviews

-Compliance Officer Monthly Reports

-Internal Reports and meetings

…Others

-Questionnaires to the Afores

-Self-correction programs

Camino a Santa Teresa # 1040 8o. piso, Col. Jardines en la MontañaDelegación Tlalpan, C.P. 14220, México D.F.

Tel. +52 (55) 3000-2608 y 3000-2548 www. consar.gob.mx

Comisión Nacional del Sistema de Ahorro para el Retiro

Session II: Risk Identification and Focus and Risk Indicators

Risk Identification in practice

Thursday 8th September, 2011, Lima - Peru