Country risk is defined as losses arising from events in a  country that include an act of government, war, terrorism,  civil strife or economic crisis.  The Country Risk Policy guides the management of  Macquarie’s country risk. Countries are grouped into  categories based on the country’s risk profile. Before any  exposure is taken in a country that is considered to be high- risk, a review of the economic, political and operating  environment is undertaken to determine the level of exposure  that is considered to be acceptable. Where appropriate,  measures to mitigate country risk are put in place.  Market risk is the exposure to adverse changes in the value of  Macquarie’s trading portfolios as a result of changes in market  prices or volatility. Macquarie is exposed to the following risks  in each of the major markets in which it trades: The risk of loss from incorrect or inappropriate pricing and  hedging models is mitigated by the requirement for all new  pricing models to be independently tested by the specialist  Quantitative Applications Division within RMG. Aggregate market risk is constrained by two risk measures,  VaR and the Macro-Economic-Linkages (MEL) stress  scenarios. The VaR model predicts the maximum likely loss  in Macquarie’s trading portfolio due to adverse movements  in global markets over holding periods of one and 10 days.  The MEL scenario utilises the contingent loss approach to  capture simultaneous, worst case movements across all  major markets. Whereas MEL focuses on extreme price  movements, VaR focuses on unexceptional changes in  price so that it does not account for losses that could occur  beyond the 99 per cent level of confidence. For this reason,  stress testing remains the predominant focus of RMG as it  is considered to be the most effective mechanism to reduce  Macquarie's exposure to unexpected market events. Macquarie is also exposed to the correlation of market  prices and rates within and across markets.  Macquarie has long favoured transparent scenario analysis  over complex statistical modelling as the cornerstone of risk  measurement.  MEL calculates Macquarie’s total market risk exposure to global  market stress test scenarios extrapolated from historical crisis  events and global market correlations. Each stress test scenario  includes a primary shock to either equity or energy markets as  well as cross-market effects in corporate margins, metals,  foreign exchange, interest rates and commodities. MEL is  Macquarie’s preferred internal measure of aggregate market risk  because of the severity of the shocks applied and the ability for  scenarios to develop with changing market dynamics. MEL is  monitored and reported to senior management daily and to the  Board regularly. It is reviewed by RMG regularly to ensure the  measure remains appropriate for changing market conditions  and the risks to which Macquarie is exposed. All trading activities contain calculated elements of risk  taking. Macquarie is prepared to accept such risks provided  they are within agreed limits, independently and correctly  identified, calculated and monitored by RMG, and reported  to senior management on a regular basis. RMG monitors positions within Macquarie according to  a limit structure that sets limits for all exposures in all  markets. Limits are applied at a granular level to individual  trading desks, through increasing levels of aggregation to  divisions and Operating Groups, and ultimately, Macquarie.  This approach removes the need for future correlations or  scenarios to be precisely predicted as all risks are stressed  to the extreme and accounted for within the risk profile  agreed for each business and Macquarie in aggregate.  Limits are approved by senior management with appropriate  authority for the size and nature of the risk, and Macquarie  adheres to a strict ‘no limit, no dealing’ policy. If a product  or position has not been authorised and given a limit structure  by RMG, then it cannot be traded. Material breaches of the  approved limit structure are communicated monthly to the  Macquarie and Macquarie Bank Boards. RMG sets three  complementary limit structures: The ‘Market Contagion’ scenario, typically the most  conservative of the MEL stress test scenarios, accounts for  all the significant markets to which Macquarie is exposed.  The assumptions in this scenario are considerably more  severe than the conditions that prevailed throughout the  Global Financial Crisis. The 'Market Contagion' scenario  measures the impact of an instantaneous equity market  crash of 15 to 30 per cent as well as additional shocks to  foreign exchange, metals, interest rate, energy, agricultural  commodity and credit markets. Macquarie’s exposure to the  ‘Market Contagion’ stress test scenario increased slightly  compared to last year as trading businesses managed  exposures whilst looking to take advantage of recovering  markets. The average exposure to the MEL stress test  scenario represents less than five per cent of total equity. 29  Macro-Economic-Linkages  Trading market risk Market risk Aggregate measures of market risk  Country risk GLYPH<150> commodities and energy  – changes in the price and  volatility of base metals, agricultural commodities and  energy products.  GLYPH<150> equities  – changes in the price and volatility of individual  equities, equity baskets and equity indices, including  the risks arising from equity underwriting activity GLYPH<150> interest rates and debt securities  – changes in the  level, shape and volatility of yield curves, the basis  between different debt securities and derivatives and  credit margins GLYPH<150> foreign exchange and bullion  – changes in spot and  forward exchange rates and bullion prices and the  volatility of exchange rates and bullion prices GLYPH<150> Value-at-Risk (VaR) limits  – statistical measure that  determines the potential loss in trading value at both  a business and aggregate level. GLYPH<150> position limits  – volume, maturity and open position  limits are set on a large number of market instruments  and securities in order to constrain concentration risk  and to avoid the accumulation of risky, illiquid positions GLYPH<150> contingent loss limits  – worst case scenarios that  shock prices and volatilities by more than has occurred  historically. Multiple scenarios are set for each market  to capture the non-linearity and complexity of  exposures arising from derivatives