“Skin in the Game”
What safeguards should be in place, to minimize the risks posed by financial derivatives? CME Group requires that its Clearing Members support the risk of their portfolios by “putting some skin in the game,” said Jason Silverstein, Executive Director and Associate General Counsel of CME Group, a body that includes the Chicago Mercantile Exchange and the New York Mercantile Exchange among its subsidiaries. “It’s a story of balancing incentives, in order to stabilize losses. Our belief is that it should be significant and risk-based.” Silverstein was the second of four presenters at a webinar titled Derivatives Regulatory Update held on […]
Towards Reducing Systemic Risk
Have the risks posed by financial derivatives in the context of the current, still evolving, regulatory landscape been properly addressed? Michael Piracci, Director of PCB Compliance at Barclays, said that nowadays he has “a lot of interactions day-to-day with the clearinghouse” and overall, “it makes me feel a little more comfortable there’s a good system in place.” Piracci was the first of four presenters at a webinar titled Derivatives Regulatory Update held on March 31, 2015, sponsored by the Global Association of Risk Professionals. Piracci began by explaining the role of the Central Counterparty (CCP) and the Futures Commission Merchants […]
Aligning Risk Appetite. Part 2
To succeed, a company must take risk, but how can it keep a close enough watch to make sure the risks do not demolish its very existence? After Chris Mandel described the risk appetite framework in part 1 of this posting, Brenda Boultwood, Senior Vice President of Industry Solutions at MetricStream, took the floor to describe how technology can make it happen. She was the second of two presenters at the webinar “Aligning Risk Appetite with ERM Governance” sponsored by the Global Association of Risk Professionals on March 17, 2015. Boultwood said that risk assessment can be a “unifying call” […]
Aligning Risk Appetite. Part 1
“How can you manage risk without understanding risk appetite?” asked Chris Mandel, SVP Strategic Solutions at Sedgwick, Inc. He was the first of two presenters at the webinar “Aligning Risk Appetite with ERM Governance” sponsored by the Global Association of Risk Professionals on March 17, 2015. “Some people ask why do I have to go through a bureaucratic exercise,” Mandel said, pointing out that there are real advantages to developing a risk appetite framework (RAF). Risk appetite management is expected more and more often by regulators, credit rating agencies, institutional investors, and internal auditors. “Missing the connection between risk and […]
Tailoring Risk Model to Investment Strategy
Due to the growing complexity of measuring financial risk, “risk has become a patchwork” of different models, said Phil Jacob, Senior Director at Axioma Risk Research. He was the sole presenter in a webinar about tailoring the right risk model to your investment strategy held on March 4, 2015, and sponsored by the Global Association of Risk Professionals (GARP). Jacob identified four inherent challenges. “There are operational issues stemming from existing rigid approaches,” leading to “difficulty in aggregating risk.” There is a lack of consistency in modeling portfolios, which can run the gamut from very simple proxies all the way […]
Alternative Mutual Funds 3
“I can’t stress enough: Boards are now being asked to look at things in great detail,” said Kathleen Moriarty, Partner at Katten Muchin Rosenman LLP. “We spend a lot of time educating the Board,” she said, referring to the Board of Directors of alternative mutual funds. It’s simply that the Board is required to understand the fund at a deeper level than ever before. Moriarty was the third of three speakers at a GARP-sponsored webinar on Alternative Mutual Funds: Risk Governance Under SEC Security on February 17, 2015. She described a recent instance of going over the legislation on mutual […]
Alternative Mutual Funds 2
“SEC’s mission is to protect investors and support responsible capital formation,” said Raymond Slezak, Assistant Regional Director at the Securities and Exchange Commission (SEC). He was the second of three presenters at the GARP-sponsored webinar held February 17, 2015, on Alternative Mutual Funds: Risk Governance Under SEC Security. Liquid alternative mutual funds were “listed as a priority” as early as 2013, he said, because “any time there’s rapid growth” or “concern about the dynamics of money managers moving into an area,” it attracts SEC interest. As a metaphor about the regulatory thought about the new funds, Slezak repeated a quotation […]
Alternative Mutual Funds 1
Alternative mutual funds have been experiencing a growth “nothing short of phenomenal,” said Amy Poster, Director of Financial Services Advisory at Berdon LLP, “and this has not escaped the notice of the Office of Compliance Inspections and Examinations (OCIE).” She was the first of three speakers in a webinar about alternative mutual funds held on February 17, 2015, and sponsored by the Global Association of Risk Professionals (GARP). She pointed to a 2014 Barclays study, Developments and Opportunities for Hedge Fund Managers in the ’40 Act Space , that estimated assets controlled by liquid alternative funds would reach between $USD […]
Stress Testing Mortgages. Part 2
The team of Scott L. Smith, Jesse Weiher, and Debra Fuller at the Federal Housing Finance Agency (FHFA) use specialized financial models to estimate potential losses. They carried out empirical tests of countercyclical shocks using four different models of mortgage credit risk. This posting continues a February 4, 2015, presentation by Scott L. Smith to an audience of financial risk managers at Global Association of Risk Professionals (GARP). Two models were devised at FHFA, and two are commercially available credit models: one, called Black Knight (formerly LPS-AA), and the other called ADCO Loan Dynamics. The estimated losses were converted to a capital […]
Stress Testing Mortgages. Part 1
“One needs to be careful and not over-reliant on any one model,” said Scott L. Smith, Associate Director for Capital Policy at the Federal Housing Finance Agency (FHFA). He was referring to the financial models used by major financial institutions to estimate potential losses. On February 4, 2015, he was presenting a GARP-sponsored webinar on countercyclical stress tests to set capital requirements. Smith explained how credit risk is measured for mortgages, and described a way to embed stress testing that uses countercyclical concepts. He and colleague Jesse Weiher, Senior Economist at FHFA, performed dynamic stress testing that was adjusted to […]