Buying into a company could become like buying a Treasury bond with guarantees of safe returns. "You might even insure share price," says Leslie Rahl, a principal of Capital Market Risk Advisors, Inc. in New York.

(February 8, 1999)

Much of the problem in the recent debacles has been the unaccounted difference between the value of collateral at a trade's execution and the mark-to-market values down the road, according to Leslie Rahl, with Capital Market Risk Advisors, a New York-based consulting firm. Most firms, she says, mark-to-market the instrument at a mid-market or standard price, but that is not adequate and could provide inaccurate numbers if the market fluctuates and the difference between the bid and offer prices widens.

Consulting firms such as Capital Market Risk Advisors pushed financial institutions to stress test their portfolios and to make sure that risk managers understand the information generated by risk models.

(March 1999)

The strategy seemed foolproof -- until last summer's Russian financial crisis. On August 17, Russia defaulted on its debt and triggered a global panic. Investors sold whatever they were holding and bought the safest things around, typically US treasuries and German bonds. In the "flight to quality", tiny price anomalies flew wildly out of whack. "All of the classical relations that you rely on went out the window," says Leslie Rahl, President of Capital Market Risk Advisors, a risk management consulting firm in New York.

(February 26, 1999)

The use of leverage, essentially borrowed money, can make portfolios volatile. "Lots of investors that are heavily leveraged have been reminded time and time again of the perils of leverage," said Leslie Rahl, principal with Capital Market Risk Advisors Inc., New York.

(March 22, 1999)

Leslie Rahl, principal with Capital Market Risk Advisors, New York, said she hasn't seen signs indicating derivatives use is falling among pension plan sponsors. In addition, the fact that more plan sponsors are reporting the use of swaps is in general a better indicator of derivatives use than is reported use of futures or options, Ms. Rahl said.

(January 25, 1999)

ONCE BURNED, TWICE SHY - NEW RESEARCH shows that multinational banks and other financial institutions did indeed learn from the international credit crisis of 1998. The survey by Capital Market Risk Advisors of New York examined responses from a group of major banks, investment banks and a few funds on four specific areas: stress tests, collateral management, documentation of basis risk and the integration of market and credit risk.

(December 1999)

Leslie Rahl, president of Capital Market Risk Advisors Inc., a consulting firm specializing in risk management and derivatives, said these firms have recognized that "having the strong quantitative skills is as important as having the trader's instinct."

In an October 1997 survey conducted by CMRA of 200 of the largest financial firms around the world, three-quarters of the respondents reported moderate or high dependence on financial mathematics techniques.

(October 4, 1999)

(February 8, 1999)

"One of the things that distinguishes some of the contracts that have been successful from some of the contracts that have been unsuccessful is are there natural buyers and natural sellers?" said Leslie Rahl, the president of Capital Market Risk Advisors.  "If everyone wants to go the same way, there's a problem maintaining proper liquidity."

(March 25, 1999)

Leslie Rahl, president of Capital Market Risk Advisors in New York, told the group that too many people are becoming mesmerized with value-at-risk (VaR) and other quantitative techniques. Rahl agrees that these tools are valuable. But she thinks that we will look back on them 10 years from now with the same amusement which "state-of-the-art" approaches from the 1980s now inspire. Rahl pointed out that the quantitative part of risk management represents only about one third of a comprehensive risk management programme. "Senior managers - with practical wisdom -definitely need to get involved in helping to set the assumptions behind some of these complex models," she said. For now, Rahl thinks that basic checks and balances, the operational controls, are key to managing risk. Rahl should know. Rahl's firm has surveyed major financial institutions around the world about how the Russian crisis and the LTCM problem affected risk management. There has clearly been some progress. Rahl's latest survey found that the greatest impact was the integration of market risk and credit risk functions. Only 9% of the firms had combined them before the crisis, but 64% have done that now. More firms are also focusing on documentation basis risk. That's up from 60% before the crisis to 90% now. But Rahl is concerned that not enough institutions are stress-testing the correlations among risks. That proportion went up by only 9%, from 45% before the crisis to 54% now. Perhaps traders should dump some stock after a revelation like that. But to parse what really moves the market, tune in whenever Greenspan gives a dinner speech in Washington. Check the menu and test the food.

(November 1999)

Leslie Rahl, a consultant who worked for 20 years at Citibank says: "I wonder how many senior managers can actually read the reports their derivatives team gives them."

(June 1999)

Leslie Rahl, president of Capital Market Risk Advisors, found the guidance like "the flag and apple pie." She explained, "It's good common sense, but there's nothing really people shouldn't already be doing."

(February 8, 1999)
 

According to CMRA's Rahl, plan sponsors should be aware of violations of investment guidelines. One common problem is an outside manager who fails to report losses. Says Rahl, "Investment guidelines are often unmonitored by compliance staff and managers override limits." How many trades should be monitored? "That depends. You could monitor every trade if you had the resources. What's more important is to remember the 80/20 rule: 80% of the risks probably come from 20% of the trading. High volume, standardized transactions don't cause operational risk; it's transactions outside the system, the low volume, high impact trades that you should watch."

What does CMRA advise its clients? "Conduct annual reviews of outside managers. Question them on all aspects of risks. Ask, 'How do you ensure that one person can't change the system? How do you make sure guidelines are respected?' It's important to use common sense," Rahl emphasizes. "Risk managers need to ask themselves, 'Does it pass the smell test?"'

(November 1999)