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Risk Management

QUALITATIVE INFORMATION

Casa de Bolsa Finamex, with the goal of having a higher level of competency and taking into account the growing complexity and volatility of the Financial Markets, has reinforced its Risk Analysis structure.

We have implemented control systems to monitor and optimize the risk-benefit relationship in a timely and complete way, establishing policies, limits and controls for the different lines of business, and determining the capital necessary for protection.

Risk control is managed by the following internal bodies:

BOARD OF DIRECTORS

Authorizes the methodology and maximum risk tolerance levels.

Reviews positions and risk quantifications on a quarterly basis.

RISKS COMMITEE

Meets on a monthly basis.

Proposes methodology and the maximum tolerance levels.

Authorizes lines of credit & counterparty lines.

Monitors limits and risk tolerance levels.

RISK MANAGEMENT UNIT

Identifies, quantifies and reports risk exposure on a daily basis.

Monitors and ensures daily compliance with the authorized risk limits for each executive and at the aggregate level.

Risk quantification is carried out using technological tools such as “VaR Global”, “SIF” internal systems, together with a database that has the following sources of information: Bloomberg, Price vendor and pages for Regulatory Institutions.

REVIEW METHODOLOGY BY TYPE OF MARKET RISK

The Market Risk quantification and measurement methodology is based on four processes:

VALUE AT RISK - VaR

Casa de Bolsa Finamex uses the VaR to quantify the market risk, which should be read as the loss that, at a confidence level of 99%, would not be exceeded within the time horizon considered, which in our case is one day, which is obtained using the historical method, which uses 500 real pieces of data and scenarios, respectively.

ANALYSIS CARRIED OUT BY DV01

Calculated on a daily basis, using correlation and liquidity indexes to obtain the risk for each instrument.

STRESS TEST

This test is calculated and presented monthly. The intent is to obtain the highest potential losses based on the following: historical variances are used for horizons of one and five days, considering two different periods: 1,100 data points, and the history resulting from October 1, 2008 to the current date (considers critical scenarios from 2008). The Risk Committee establishes risk limits for VaR and STRESS as a proportion of the Institution’s Overall Capital.

BACK TESTING

Calculated on a daily basis. Risk estimates calculated a priori using the Value at Risk model are compared to the results observed (posteriori) for each instrument/market with a confidence level of 99%, valuing whether the set observed in fact does not exceed the VaR by 1% in all of the observations. The results are presented to the Risks Committee on a monthly basis.

CREDIT RISK

Finamex uses parameter models based on the Credit Ratings and Financial Information of the institutions analyzed.

There are global counterparty limits for the intermediaries with which transactions are carried out with in the Money Market, Derivatives and Exchange Markets, which are captured, validated and controlled by the systems.

The lines of credit and counterparty lines are authorized by the Risks Committee.

LIQUIDITY RISK

The Risks Committee establishes limits for the potential maximum loss under stress scenarios as a proportion of the Overall Capital of the Brokerage Firm, since the Liquidity Risk assessment is addressed by establishing that the likelihood of occurrence of the Liquidity Risk is much higher in stress situations for the risk factors than when there is stability in the markets. In addition, limits have been established with respect to the Overall Capital of the Brokerage Firm with respect to potential losses under stress scenarios that limit the Funding Risk of positions in situations that represent significant impairments.

In addition to the above, Finamex has a report for the Derivatives Market that is classified by type of derivate and settlement date (from 24 hours to 3 months). This report is prepared and considered for measuring the liquidity for these markets at different terms.

OPERATIONAL RISK

The risks that may arise due to daily operations are controlled as follows:

1. Internal Audit Reviews, the work schedule for which is authorized by the Board of Directors, and maintaining a record of all of the observations, recommendations and levels of compliance.
2. Operating manuals for all of the relevant areas of the Brokerage Firm.
3. Contingency plans to respond to a large number of extraordinary situations.
4. Document of excesses, errors and legal issues.
5. There are logs where the different areas record operating risks, which are reviewed on a monthly basis by the Risks Committee and the different individuals responsible for the areas, who implement new procedures, controls and/or actions to minimize the occurrence of such events, which to date have not represented any significant monetary losses.
6. There are established limits for legal and technological risks, which have not been exceeded; the Risks Committee reviews the status of such in detail on a quarterly basis.