KeyBank 2014 Annual Report Download - page 90

activities. Market risk policies and procedures have been defined and approved by the Market Risk Committee, a
Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the
business environment.
MRM is an independent risk management function that partners with the lines of business to identify, measure,
and monitor market risks throughout our company. MRM is responsible for ensuring transparency of significant
market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior
management. The various business units and trading desks are responsible for ensuring that market risk
exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and
through routine stress testing, sensitivity, and scenario analyses. MRM conducts stress tests for each covered
position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are
prepared daily and distributed to appropriate management.
Covered positions. We monitor the market risk of our covered positions, which includes all of our trading
positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a
trading account. All positions in the trading account are recorded at fair value, and changes in fair value are
reflected in our consolidated statements of income. Information regarding our fair value policies, procedures and
methodologies is provided in Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair
Value Measurements” and Note 6 (“Fair Value Measurements”) in this report. Instruments that are used to hedge
nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded,
and securities financing activities, do not meet the definition of a covered position. MRM is responsible for
identifying our portfolios as either covered or non-covered. The Covered Position Working Group develops the
final list of covered positions, and a summary is provided to the Market Risk Committee.
Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of
covered positions, and do not separately measure and monitor our portfolios by risk type. The descriptions below
incorporate the respective risk types associated with each of these portfolios.
/Fixed income includes those instruments associated with our capital markets business and the trading of
securities as a dealer. These instruments may include positions in municipal bonds, bonds backed by the
U.S. government, agency and corporate bonds, certain mortgage-backed securities, securities issued by the
U.S. Treasury, money markets, and certain CMOs. The activities and instruments within the fixed income
portfolio create exposures to interest rate and credit spread risks.
/Interest rate derivatives include interest rate swaps, caps and floors, which are transacted primarily to
accommodate the needs of commercial loan clients. In addition, we enter into interest rate derivatives to
offset or mitigate the interest rate risk related to the client positions. The activities within this portfolio
create exposures to interest rate risk.
/Credit derivatives include credit default swaps, which are used to mitigate loan portfolio credit risk, and
credit default swap indexes, which are used to manage the credit risk exposure associated with anticipated
sales of certain commercial real estate loans. The transactions within the credit derivatives portfolio result in
exposure to counterparty credit risk and market risk.
VaR and stressed VaR. VaR is the estimate of the maximum amount of loss on an instrument or portfolio due to
adverse market conditions during a given time interval within a stated confidence level. Stressed VaR is used to
assess the extreme conditions on market risk within our trading portfolios. MRM calculates VaR and stressed
VaR on a daily basis, and the results are distributed to appropriate management. VaR and stressed VaR results
are also provided to our regulators and utilized in regulatory capital calculations.
We use a historical VaR model to measure the potential adverse effect of changes in interest rates, foreign
exchange rates, equity prices, and credit spreads on the fair value of our covered positions. Historical scenarios
are customized for specific covered positions, and numerous risk factors are incorporated in the calculation.
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