While the resulting market chaos passed within months, the disputes between derivatives counter parties over valuations, definitions of swap agreements, and other complex matters have lingered. "Many of them are still being played out," said Leslie Rahl, president of Capital Market Risk Advisors in New York, a consultant on risk management and derivatives.

(January 20, 2000)

EDITORS CHOICE: DERIVATIVES WEB SITES

Most risk management consultancies use their web sites simply to hawk their devastatingly brilliant products and services. Not Capital Market Risk Advisers, the New York-based risk management consultancy. Sure, there is the obligatory product catalog, but CMRA does its competition one better by offering users, after a free registration, access to a gold mine of risk management articles, presentations and speeches written by CMRA employees. The booty includes 13 articles on value-at-risk, two on model risk, one on operational risk, nine of risk management for institutional investors, three on stress-testing, three on credit risk management, one on corporate risk management, seven on general risk management, and five survey summaries covering Long-Term Capital Management and other timely issues. Moreover, the risk standards from the Risk Standards Working Group are available in full.

Risk managers, accountants, treasurers and academics should pop in from time to time to catch up on CMRA's latest research.

(February 2000)

Leslie Rahl, president of New York-based consulting firm Capital Market Risk Advisors, Inc., also points to lessons that sellers gleaned from the 1990s. "Sellers learned about the need for suitability and communications standards with end-user clients," she says. "Now there are much stricter standards within institutions as to what is an appropriate level of client communication. There are also processes for making sure that someone at a level more senior than the individual who is executing a complex trade is aware of and approves the trade."

(May 2000)

Over the next few years, there will be a significant increase in the attention given to model risk, according to a report by Meridien Research and Capital Market Risk Advisors.

(January 31, 2000)

"Unwinding a custom-made structure is much more difficult than something that's highly liquid," says Leslie Rahl, president of Capital Market Risk Advisors Inc. in Manhattan.

(September 4, 2000)

“The use of VaR by non-financial companies is limited but emerging", says Leslie Rahl, president of Capital Market Risk Advisors, a New York-based consultancy. "So far, it has tended to be just very big corporates using it, but the appeal of VaR will widen."

"VaR isn't just about reducing risk. It's also about capital allocation, about getting the biggest bang for your buck." - Leslie Rahl

(June 2000)

How quickly they forget. Ever since the near-collapse of hedge fund Long-Term Capital Management brought the threat of government regulation to this freewheeling industry, hedge funds have been promising better self-regulation, including sophisticated risk management. But probably less than a third have actually implemented value-at-risk (VAR) techniques, the market-based methodology used to estimate potential future losses.

That's according to Capital Market Risk Advisors, Inc...(view article)

(June 5, 2000)

Whatever additional risk management techniques are being taken are probably a result of increased pressure from investors and improving technology, the study's authors said. In the past, investors didn't make such demands. "Historically, someone might meet with a fund manager and say, 'I trust you, you seem like a nice guy.' But funds are increasingly using more risk assessment strategies that they can then show investors," said CMRA, "It's more of an evolution rather than a revolution."

(June 5, 2000)

The survey, which has been produced by New York-based consultants Capital Market Risk Advisers (CMRA), claims that most funds have not substantially increased their risk reporting despite growing investor demand for risk information since the LTCM crisis. However, the majority of the funds who responded to the surveyed did say they calculate and use various risk measures such as value-at-risk, liquidity risk measures and scenario testing for internal reporting.

The CMRA survey polled roughly 30 hedge funds of various sizes, representing five styles: fund of funds, managed futures, risk arbitrage, long/short and macro. Although the sample size is very small, the survey highlights some interesting trends.

"In an environment which has treasured its confidentiality, the survey shows there is an increasing demand for information and increasing capabilities for providing this information to the market," says Capital Market Risk Advisors in New York.

(June 2000)

However, even the most well-designed systems cannot wholly lift the burden of structuring tests from complex hedges. "It is not the system per se that's the major constraint, it's the need to take actual positions and devise the tests," says CMRA's Rahl. "The devil's in the details."

(May 2000)

A hedge fund style falters

"The real issue is the size of positions," said Leslie Rahl, president of Capital Market Risk Advisors in New York City. "It's like trying to turn around a gigantic ocean liner."

(May 11, 2000)

Economic Policy Review

Leslie Rahl emphasized the increasing complexity of risk management over the past ten to fifteen years, and remarked that the likely combination of business lines in the future suggests even greater challenges. Rahl began by presenting a long list of the risks facing financial companies, one that has been growing over time (see Galaxy of Risks). She used the analogy of an iceberg to illustrate the key issue faced by risk managers contemplating such a list of risks: everyone understands the existence of the iceberg, but no one knows what it looks like under the water.

Rahl pointed out that the analytical components of risk management - value at risk, stress testing, backtesting, model review, and limits - are all important. Nevertheless, echoing a theme of Sabatacakis, she emphasized that risk management culture matters most. In some firms, for example, violations of exposure limits lead to termination of staff, while in others it is viewed as only a minor infraction.

More generally, Rahl argued that models will never capture the full “galaxy of risks.” Things tend to go wrong, she warned, when people begin to believe the numbers. Clever forms of fraud, new market moves, acts of God, and regulatory surprises - to name a few - always threaten to overwhelm a models assumptions. A simple value-at-risk model that assumes that financial time series are normally distributed would consider market moves beyond two standard deviations to be relatively unlikely and moves beyond three standard deviations to be almost unheard of. She noted that in each of the past ten years, for example, at least one market moved by more than ten standard deviations - a statistical impossibility under a normal distribution.

Rahl also cautioned against using value at risk as a worst-case scenario...

(June 2000)

Capital Market Risk Advisors in New York, says one of the biggest opportunities is in hedge funds. While hedge funds don't face the same regulatory pressures that banks do, he says, "the pressure for risk management is coming gradually from investors." Moreover, CMRA adds that hedge funds are "increasingly looking to attract pensions and institutional investors and the more sophisticated investors requiring more sophisticated risk management."

(December 1, 2000)

Working Group formed to address increased risk disclosure

Some possible outcomes from the Working Group could include a more standard method of accounting for risk at least in terms of disclosure purposes. "Right now one of the problems is that even the limited risk information that is made available isn't comparable. If you look at one firm's VaR of 12 and another's VaR of 12, you don't really know who has more risk because they could be counting very different ways," says Leslie Rahl, president of Capital Market Risk Advisors, a financial advisory firm specializing in risk management. "I think it's definitely possible to set a more consistent measurement, say on quarterly reports to agree to use the same period of history or the same methodology."

(July 1,2000)

The availability of over-the-counter derivatives is another reason not to count on regulators and exchanges to stop rogue traders, says Leslie Rahl, president of Capital Market Risk Advisors, a New York derivatives consulting firm. Ultimately, says Rahl, a firm's internal controls - the kind that failed so miserably at Barings - are the only way to ensure against wild speculation.

(March 13, 2000)

This includes knowing that an early exit can be difficult and costly. “Unwinding a custom-made structure is much more difficult than something that’s highly liquid,” says Leslie Rahl, president of Capital Market Risk Advisors Inc. in Manhattan.

(August 28, 2000)

The warning is timely. About 30 percent of all derivatives losses in 1999, or $5 billion, was directly tied to varieties of operational risk, according to Capital Market Risk Advisors, Inc. The London Stock Exchange went dark April 5 because of operational gremlins. Yet the legitimacy of such is not widely accepted.

(May 11, 2000)

US-based financial advisory firm Capital Markets Risk Advisors (CMRA) and analytical research providers Meridien Research, last week released a report titled Models vs. The Market: Survival of the Fittest'. The report examines model risk, to which it attributes $5.5 billion of losses in 1999, and suggests a series of steps financial services institutions can take, not only to identify vulnerability to model risk, but also to implement business practices and technology solutions to mitigate it. At the report's release CMRA observed: "Model risk continues to haunt even those institutions with top-tier risk management processes. In the past, model risk tended to relate to complex interest rate derivatives. Today, however, we are now seeing increased losses on credit sensitive transactions such as credit derivatives and Collateralised Debt Obligations."

(January 18-24, 2000)

Some possible outcomes from the Working Group could include a more standard method of accounting for risk at least in terms of disclosure purposes. "Right now one of the problems is that even the limited risk information that is made available isn't comparable. If you look at one firm's VaR of 12 and another's VaR of 12, you don't really know who has more risk because they could be counting very different ways," says Leslie Rahl, president of Capital Markets Risk Advisors, a financial advisory firm specializing in risk management. "I think it's definitely possible to set a more consistent measurement, say on quarterly reports to agree to use the same period of history or the same methodology."

She adds that while firms may continue to measure their risks in other ways as well, the consistent risk measurement could be used in addition, to address any disclosure requirements suggested by the Working Group. "I fully respect each institution's fight and need to manage itself counting the way it is most comfortable, but that doesn't mean that from time to time they can't agree to count on a standard basis so that at least the counting is comparable," adds Rahl.

(July 2000)