The Asset Liability Management (ALM) team is responsible for allocating funding to various lending products, and for ensuring that the currency, interest rate and maturity sensitivity characteristics of the Bank’s assets and liabilities are within prescribed risk parameters. To achieve this, ALM makes extensive use of derivative instruments including currency swaps, interest rate swaps and other interest rate management products.
The ALM team develops new products and innovative market solutions tailored to meet clients’ individual hedging needs. As part of this, they collaborate with other units to provide technical training to borrowers on pricing, market execution and credit aspects of hedging products and participates in negotiations on Master Derivatives Agreements (MDAs) with borrowers. The ALM team works closely with clients to develop hedging strategies and market tools to achieve their specific debt management objectives. |
An Example: Risk Management Strategy and Execution for IFFIm
As the Treasury Manager, the World Bank manages, mitigates and monitors financial risks arising due to differences in currency basis and timing of pledges from donors, disbursements and debt service of IFFIm. The risk management tools that are used include, among others, currency swaps and currency forwards, interest rate swaps and forward rate agreements. IFFIm and the Treasury Manager have entered into a master derivatives agreement and the Treasury Manager hedges IFFIm’s risk positions using its counterparties in the market.
IFFIm’s risk management framework incorporates:
- a prudent approach to balance sheet management, with the aim of mitigating and controlling financial risks;
- suitable risk limits and policies and procedures formulated to ensure that the limits are not breached; and
- appropriate systems, controls and reporting mechanisms for measuring and monitoring residual risks.
In this context, we provide the following services to IFFIm:
- Policy Analysis: develop the risk management framework, taking into account IFFIm Board’s risk preferences, balance sheet dynamics and market limitations, as well as credit, interest rate, operational and foreign currency risks, and the different instruments available for risk transfer
- Strategy Design: advise IFFIm’s Board on optimal risk transfer through a broad-based suit of risks to be hedged out and the instruments available, based on modeling and evaluation of risk management options
- Structuring, Negotiating and Executing transactions to efficiently remove interest rate and foreign currency exposure based on IFFIm’s board-approved risk management strategy; tactical decision-making on overall execution strategy and timing for transacting on the different currencies to accommodate to market and liquidity limitations; benchmark counterpart market quotes based on in-house models to negotiate prices and ensure best execution.
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