MARKET RISK, CORPORATE GOVERNANCE AND THE REGULATION OF FINANCIAL FIRMS

The growth in derivative activities, and the change in the way financial firms conduct these activities, has led to the development of practices within firms to manage risk. These practices relate to both the organisational context in which risk management takes place, and the measurement of market risk. Proposals and recommendations have been made in a number of reports in an attempt to encourage firms to adopt best practice, as identified by the Group of Thirty, through public disclosure requirements and rides for determining the amount of regulatory capital to support trading and derivatives activities. The adoption of best practice, together with the benefits of increased transparency and more appropriate methods for determining capital requirements, is seen to lead to a reduction in systemic risk. This paper examines the main proposals and recommendations made in the reports. In particular, the use of market risk measurement models, developed for internal risk management purposes, for public disclosures of market risk and for calculating regulatory capital is critically examined.