IV. Market Risk

24. Commercial banks shall, based on their overall market risk management policies and the actual financial market situation in the PFTZ, develop market risk management policies appropriate to their business practices in the PFTZ, covering the interest rate risk, exchange rate risk, commodity price risk, stock market risk and other risks.

25. Commercial banks shall demonstrate the capability of risk measurement appropriate to the nature and complexity of their business practices in the PFTZ which shall undergo continuous authoritative verification.

26. Commercial banks shall have in place relatively independent systems of market risk limits and market risk reporting for their business practices in the PFTZ to provide continuous monitoring and control and establish the processing procedures in case of limits breach.

27. Commercial banks shall have in place an interest rate risk management mechanism for bank accounts in relation to their business practices in the PFTZ and, based on the characteristics of cross-border transactions as well as sound analysis and prediction of the special pricing mechanism of liberalized interest rates in the PFTZ, try to determine a practical yield curve.

28. Commercial banks shall take into full consideration in measuring interest rate risk for bank accounts in relation to their business practices in the PFTZ the characteristics of re-pricing risk, basis risk, yielding curve risk and optionality risk and the correlation between the interest rate risk for bank accounts in relation to their business practices in the PFTZ and the banks’ overall interest rate risk.

29. Commercial banks shall conduct stress testing, in view of the present situation of their business practices in the PFTZ, related business development strategies, total changes and structural changes in assets and liabilities, and characteristics of interest rate risk, and use the testing results in developing emergency response plans, designing policy processes and setting risk limits.

30. Commercial banks shall develop exchange rate risk management policies for their business practices in the PFTZ and establish the trading mechanism and procedures to square off foreign exchange open positions (including those arising from the free conversion between RMB and foreign currencies) under the accounts for which open positions are not allowed by relevant regulations.