HONG Kong banks and securities firms may have to follow a new set of guidelines on the sound risk management of derivative activities currently issued by the two international banking and securities regulators. The Basle Committee on Banking Supervision, a body composed of various banking supervisory authorities, together with the Technical Committee of the International Organisation of Securities Commissions (IOSCO), jointly released separate guidelines regarding internal risk management of derivative trading to banking and securities regulators worldwide. Hong Kong banks are being consulted on the guidelines before actual implementation. The Hong Kong Association of Banks (HKAB), the industry's representative body, was given a copy of the guidelines and is expected to submit its comments within a few weeks. The guidelines place the job of risk management heavily on the shoulders on the companies' management. While risks in trading derivatives are nothing new, ''the growing complexity, diversity and volume of derivatives products, facilitated by rapid advances in technology and communications pose increasing challenges to managing these risks'', the Basle Committee stated. Suggested management practices include appropriate oversight by boards of directors and senior management, an adequate risk management process involving the continuous measuring, monitoring and controlling of risk, accurate and reliable management information systems, timely management reporting, and thorough audit and control procedures. Translating the principles into actual practice, the guidelines recommended banks should not link bonuses on derivatives too closely to the profits of the products. The reason is that well-paid dealers would then focus on the profitability of the trades without due regard for the risks to which the bank is exposed. Dealers should be guided by written policy spelling out how much risk banks' directors will tolerate. Bank boards should be notified regularly of the risk exposure of the bank, an area subject to consistent re-evaluation. To enable prompt and accurate reporting, dealers should be able to mark their positions to market prices at least daily, while some bigger institutions should be able to do so in real time. The heavy use of computerised systems in the trading of derivatives should prompt banks to make contingency plans for interruptions to normal processing. The guidelines are not intended as substitutes for adequate capital standards. The guidelines issued by IOSCO are similar in principles, with differences in the scope and in the degree of detail with which they are spelt out, taking into account the variant nature of a bank and a security firm.