Risk management guidelines for derivatives

As part of its on-going efforts to address international bank supervisory issues, the Basel Committee on Banking Supervision is currently engaged in several activities to strengthen the prudential supervision of banks' derivatives operations. One of these activities has been a reassessment of the key elements of sound management of the risks involved in derivatives. In 1986, the Committee issued a document entitled "The Management of Banks' Off-Balance-Sheet Exposures: a Supervisory Perspective", and it has continued to consider the issues raised in that document. As a result, the Committee is now issuing the attached paper providing guidance on sound risk management of derivatives activities for use by supervisory authorities and banking organisations. In developing these guidelines, the Committee has drawn upon those established in member countries of the Committee and upon recommendations made by the financial industry.

The Basel Committee is distributing these guidelines to supervisors worldwide with the expectation that they will facilitate the further development of a prudent supervisory approach to the risk management of derivatives. Supervisors may wish to circulate the guidelines to the institutions under their jurisdiction, either in their entirety or as modified to take into account local conditions. The Committee wishes to emphasise that sound internal risk management is essential to the prudent operations of banks and that supervisory tools, such as capital requirements, are not by themselves sufficient. Sound internal risk management is also essential to promoting stability in the financial system as a whole.