In response to the proposition for a clearinghouse that matches trades and guarantees that all contracts are honored, "It's been talked about for a long time. "  But the idea, she adds, "hasn't gone anywhere because of dealer resistance -- the costs and the complexities in agreeing on what something can be valued at." - Leslie Rahl on Regulating Derivatives

(December 15, 1998)

"We keep preaching how important stress-testing is. The kinds of financial problems we have had are in very subtle areas, and people aren't looking for those kinds of unusual events when they stress-test." - Leslie Rahl on "Hedge Fund Offers a Sorry Example"

(October 4, 1998)

Capital Market Risk Advisors, a New York consulting firm specializing in derivatives, estimates the Russian foreign exchange contracts and currency derivatives of one form or another currently total about $65 billion.

(August 27, 1998)

"...industry's fear that regulators will make the rules, rather than the participants"; said Leslie Rahl, a principal with Capital Markets Risk Advisors, a New York consulting firm specializing in derivatives.

(February 27, 1998)

Executives at some institutions are taking steps to reduce their reliance on value at risk "No one measure is enough in the kind of world we're living in." - Leslie Rahl

(December 14, 1998)

Another area getting increased attention is credit evaluation departments, where practices might not have kept up with changes in the market place, Ms. Rahl of CMRA  said. She noted fully collateralized transactions in some cases were more of a problem than noncollateralized transactions. "That´s because in very large transactions, or in situations where the collateral was not liquid, the mark-to-market value of the collateral was set too high for a crisis situation, exactly when collateral is needed. As a result, executives are beefing up their credit risk management practices."

(December 14, 1998)

CMRA´s survey showed pension executives have:

• performed a complete review of hedge fund managers;
• tightened investment guidelines;
• talked more frequently with external managers;
• and scheduled investment committee meetings to update members on risk controls.

The survey also showed 50% of broker-dealers and 30% of banks acknowledged that they did not have as complete an understanding of their risks as they wanted," CMRA´s survey summary states. But Ms. Rahl said this shouldn't raise a concern for investors using banks and broker-dealers as counterparties to transactions. "Risks aren't out of control at broker-dealers; rather, the risk issues raised this summer are a part of the ongoing learning process of managing risk. We get smarter all the time. But just because risk practices at the big banks and broker-dealers didn't work completely, that doesn't mean they aren't the best available." Ms. Rahl said.

(December 14, 1998)

A lot of people call themselves financial engineers or risk managers, but it's unclear what they know and don't know." - Leslie Rahl

 (June 1, 1998)

Institutional Investors will increase investment in risk management in 1998, and have increased their use of risk-adjusted returns, according to a survey conducted by Capital Market Risk Advisors,  Inc. Use of risk-adjusted returns also is up, according to the survey. More than 40% of institutional investor respondents use risk-adjusted returns, compared with 6% a year earlier.

(April 20, 1998)

Investment Dealers Digest

"Though some institutions have learned during the Asian crisis that they should not get their credit protection from entities in the same country as the institution whose credit they're using, nonetheless growth in that market is continuing." - Leslie Rahl

(October 5, 1998)

"VAR is important, but it's only one piece of a good risk management program. They have to beef up some of the other approaches and stress testing is probably the area. " - Leslie Rahl

(December 14, 1998)

Questions over the documentation may - at least temporarily on the heating credit derivatives market "There are some gray areas that haven't necessarily been anticipated. There will be some going back to the drawing board." - Leslie Rahl on Credit Derivatives

(October 5, 1998) 

Leslie Rahl, principal of Capital Market Risk Advisors,  Inc., added settlement glitches, faulty data input in pricing or settlement models, and the year 2000 to the mix.

(July 13, 1998)

"For larger banks, the regulators are (also) allowing capital to be allocated based on risk measures such as VAR, so there's a tremendous incentive," said Leslie Rahl, a Principal in Capital Market Risk Advisors, a risk management consultant that surveyed 300 financial institutions to determine how they were addressing the SEC´s new rule.

(April 17, 1998)

Leslie Rahl comments in an article titled "Extreme Finance" on the topic of the relationship between risk and reward: "I  absolutely believe that we're going to take lessons in finance from other parts of science."

(October 1998)

In the case of Orange County, the financial products involved were fairly straignt-forward. Problems arose largely because the county borrowed excessively to buy them.

(June 6, 1998)

"Riskier derivatives often include very high degrees of leverage, exotic cash-flow patterns, or are based on obscure markets." derivatives consultants CMRA said in the October, 1994 issue of Corporate Cashflow Magazine. Valuing such derivatives often depends "on risk that the model´s value may be different than that ultimately obtained in the market."

(September 21, 1998)

"Banks really think they have the full exposure monitored – but don't realize the full exposure until several weeks after the crisis." says Leslie Rahl, a partner at Capital Market Risk Advisors, a New York derivatives consultant. "I think it's going to get worse before it gets better."

 (September 14, 1998)

"I start to get nervous when people start to get too scientific, and get scared when everyone talks about optimizations. There is a big risk that a credit risk model ends up being a black box. It's important for banks to remember that such credit risk models are just fancy calculators"

(November 1998)
 

The widely respected risk consultants, Capital Market Risk Advisors (CMRA) in New York even went so far as to label 1997 the "year of model losses". The firm attributes losses of $2.7 billion or 40% of all derivatives losses for the year to models. Since 1987, it estimates that $4.7 billion of $23.8 billion in cumulative losses have resulted from model risk - the risk that model data inputs or assumptions, or actual mispricing errors, result in financial losses.

(September, 1998)
 

(May 1998)

"Fundamentally, the question is whether you have the luxury of looking at the probabilistic, portfolio analysis, because most of the statistical analysis does not pertain to the instruments out there", she says. "Most of the data we have is predicated on institutional recovery rates, but will the same efforts be made to collect payment now that the loans are publicly traded? Will the loss rates on CLOs ever be like those on bank loans or publicly traded bonds?"

 (March 1998)

Capital Market Risk Advisors’ Rahl, who advises that VAR models should be stress tested, nonetheless says the probability of such disastrous events occurring might have seemed low enough for many bankers to ignore them.

(November 1998)

Regarding Long-Term Capital:

"Knowing some of the people, I believe they had a good understanding of risk and bet wrong." - Leslie Rahl

(September 25, 1998)

"Models by their very nature are constantly improving. Remember in the 1980´s when we assumed that mortgages had an average of 12 years? At the time we thought that was advanced," said Leslie Rahl, principal at New York risk management consulting firm Capital Market Risk Advisors. She said that value at risk modeling may be on the verge of shifting to a higher level of sophistication due to the damage caused by Asia's swirling markets.

(February 14, 1998)

Global Investment Magazine

Global Investment Magazine profiles CMRA's efforts over two years ago to bring together representatives from eleven firms to draft risk standard guidelines. These standards are used as a reference by institutional investors and in investment advisors around the world to assess their own risk management policies and procedures. Global Investment writes of this accomplishment "although various financial industry groups have published guidelines for derivatives in the past, this is the first document to address the broad range of risk issues specific to fiduciaries and managers of multi-asset class, multi-manager portfolios."

(September 1998)

"You have to reevaluate risk in difficult times. Scrutinize. What is the Achilles´ heel of your exposure? Everyone has one." said Leslie Rahl, "When the Asian crisis first began, the Thai baht fell at half the speed and at half the magnitude that the Mexican peso fell in 1994."

(November 1998)

Leslie Rahl: I agree completely with the comments on the importance of stress-testing, but I guess I would go one step further. I think people are really making a mistake in not also stress-tesing their VaR models. Many people found out that their exposures with many counterparties were multiples of what the credit department thought they should be. Unfortunately, most stress-testing has been done in the market risk arena, rather than applied to the potential credit exposure. I would contend that the models aren’t nearly as bad as they might be portrayed, but that the assumptions being put into the models as well as the stress-testing of those assumptions have not received enough attention.

(December 1998)