The mid-office can be considered to be the conscience keeper of the treasury. It is responsible for the critical functions of independent market risk monitoring, measurement, analysis and reporting for the bank’s AssetLiability Management Committee (ALCO). Ideally, this is a full time function of reporting to, or encompassing the responsibility for, acting as Asset-Liability Management Committee (ALCO)’s secretariat. An effective mid-office provides independent risk assessment which is critical to Asset-Liability Management Committee (ALCO)’s key function of controlling and managing market risks in accordance with the mandate established by the Board/Risk Management Committee. It is a highly specialised function and must include trained and competent staff, and expert in market risk concepts The methodology of analysis and reporting will vary from bank to bank depending on their degree of sophistication and exposure to market risks. These same criteria will govern the reporting requirements demanded of the mid-office, which may vary from simple gap analysis to computerized VaR modeling. Mid-office staff may prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to risk exposures. Banks using VaR or modeling methodologies should ensure that its Asset-Liability Management Committee (ALCO) are aware of and understand the nature of the output, how it is derived, assumptions and variables used in generating the outcome and any shortcomings of the methodology employed. Segregation of duties principles must be evident in this function which must report to Asset-Liability Management Committee (ALCO) independently of the treasury function.
