The board of directors sets the basic approach to limits and reviews it periodically1. After the board sets a limit for market risk as a whole, the institution places limits for each area it manages, such as interest rate risk on bonds or equity risk, in a form that the front office can manage2.

A credit limit is a cap on the exposure to a single counterparty. A risk limit is placed on a trading unit or trader, so the two differ in what the cap is placed on.

Rules for a breach include hard limits, which require the position to be reduced or closed by force, and soft limits, which require a discussion of the investment policy. An institution may also set alarm points below the limit (such as 50% or 75% of the limit) to give a warning before the limit is reached3. Consider a hypothetical example in which the VaR limit is 1 billion yen and the alarm point is 750 million yen. A day with VaR of 800 million yen is within the limit but above the alarm point.

Notes

  1. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026), III-2-3-3-2(2)⑦ (page 125) (in Japanese). ↩

  2. Bank of Japan Financial System and Bank Examination Department, Center for Advanced Financial Technology, "市場リスク管理態勢の整備" (Building a market risk management framework) (September 2019), "市場リスク全体枠：設定の考え方" (Overall market risk limit: how to set it), page 16, and "各種リスク枠、損失限度：設定の考え方" (Risk limits and loss limits: how to set them), page 18 (in Japanese). ↩

  3. The same document, "ハードリミット、ソフトリミット、アラームポイント" (Hard limits, soft limits, and alarm points), page 26 (in Japanese). ↩