Dáil Éireann debate -
Wednesday, 5 Apr 1995

Vol. 451 No. 6

Written Answers. - Derivative Trading.

Trevor Sargent

Question:

63 Mr. Sargent asked the Minister for Finance if his attention has been drawn to the level of exposure of Irish financial institutions on the derivatives markets; and his views on whether, in a worst case scenario, exposure could be covered without undue damage to the Irish banking system. [4920/95]

Minister for Finance (Mr. Quinn)

I have been advised by the Central Bank that the scale of derivative trading by Irish banks is relatively small and is largely confined to the less exotic and more readily understandable first generation instruments such as interest rate and foreign currency swaps and forward interest rate agreements. Contracts are largely customer based, of short term maturities, less than one year and are used for non-speculative hedging purposes.

All credit institutions here are required to have in place rules and procedures for dealing with the management of all material risks. A basic control, in this regard, is the separation of trading and back-office operations. In the larger banks it is expected that the risk management function be centralised for reporting and control purposes. These rules and procedures are subject to the scrutiny of the internal and external auditors of the bank and are reviewed by the Central Bank in the course of on-site inspections.

The Central Bank further requires banks to follow best international practice and to be aware of current thinking in this area. For example, the recommendations inDerivatives: Practices and Principles published by the group of thirty in July 1993 and Risk Management Guidelines for Derivatives published by the Basle Committee on Banking Supervision in July 1994, endorsed by the Central Bank, have been implemented by the banks.

The bank considers that adherence to the principles outlined above greatly reduces the possibility of a Barings-type situation occurring here. Further it is considered given the level and nature of derivatives trading in Ireland, it poses no undue risk to the banking system. This whole area is, however, kept under ongoing review.