CMRA in the Press 2010
CRO Creation on the Rise, But Role Continues to Evolve
By Julie Goodman
A new risk governance survey indicates that the number of chief risk officers is going up among financial institutions and that the role of those CROs is becoming an increasingly strategic one – not simply one of control.
According to this year's Risk Governance: A Benchmarking Survey, 66% of CROs have both a strategic and a control role, up from 47% last year. The number of participants reporting that they have a CRO increased from 70% to 89%.
The Capital Market Risk Advisors [CMRA] survey was conducted over two weeks in July 2010 among 66 financial institutions, including asset managers, commercial and investment banks, insurance companies, plan sponsors, sovereign wealth funds, endowments and hedge funds. Of the respondents, 45% were asset managers, most of whom have mutual funds.
"In their narrowest sense, a CRO is a cop, and they keep track of the people [who] are staying within their risk limits," says Leslie Rahl, managing partner of CMRA.
"In its broadest definition, and I think in its most effective definition, the CRO is also an adviser, a participant in new product development, a thought leader in how should we think about our business. So that strategic part of their job is growing, and I think that's a very healthy sign. I think a good CRO should be much more than a cop."
The survey also stated that 84% of respondents with a board and a CRO have executive sessions at most meetings. That number is up from 44% last year. A risk appetite statement is one way to communicate those dynamics.
According to the results, 74% of respondents have board-approved risk policies, up from 60% last year.
The survey says that, over the last 12 months, changes to risk governance include modifying limits and increasing trend and exception reporting. Boards are increasingly reviewing counterparty, liquidity, and operational risk information.
The government changing the rules remains the top concern among risk managers, coming in at 40% among volatility, credit losses and other issues.
August 2010
9 in 10 institutions have chief risk officer, survey shows
By Barry B. Burr
Some 89% of pension plans, endowments, foundations, sovereign wealth funds, hedge funds and other asset managers have a chief risk officer, compared with 70% last year, according to a Capital Market Risk Advisors survey on risk governance practices at financial institutions.
While there is wide agreement among the 66 institutions surveyed of the need for a chief risk officer, "opinion varies as to whether the CRO should have both a strategic/consultative role or just a control role," said a report on the survey, Risk Governance: a Benchmarking Survey 2010.
Among respondents with CROs, 66% said their officers have both strategic and control duties, up from 47% last year, the survey found.
In addition, 84% of those have private sessions between the CRO and the board's risk committee or the full board, without management in attendance at most meetings, up from last year's 44%.
Among other results, 57% of respondents have a risk appetite statement, whose definition includes the ways an institution wants to take risk and the variability of results they want to accept. That's up from 37% last year.
Of respondents with risk appetite statements, 56% include in the statements attitudes on liquidity needs; 43% address consequences on breaching risk limits, including when the breach makes or loses money; 35% include how much to invest in hard to value assets; 33% include how much to invest in complex investments; and 33% address lack of transparency in investments.
The greatest concern cited by risk managers for the second half of this year is government changing the rules that affect investment and capital markets, cited by 40%, up from 38% last year, when it also ranked at the top.
Other top concerns for the second half of the year are volatility and credit losses, cited each by 19%; inflation, 6%; and counterparty risk, 2%. By contrast, last year, respondents ranked as their second top concern inflation, cited by 26%, followed by credit losses, 21%; counterparty risk, 7%; accountants changing the rules, 5%; and volatility, 2%.
"Overall, I think progress is being made toward more people using better risk management practices, e.g., risk appetite statements, chief risk officers, in-camera executive sessions of the risk committee or full board and the CRO without management present," Leslie Rahl, CMRA managing partner, said in an interview.
"Institutional investors (e.g., pension funds, SWF, foundations, endowments) are still lagging a bit behind other financial institutions (e.g., asset managers), such as looking at things like counterparty risk and operational risk."
Ms. Rahl said that the reason for the gap may be "overall they (institutional investors) aren't as heavily regulated (as other financial institutions). I think they've always lagged behind, but it isn't getting any worse. By the nature of the entities, they have had less pressure (on) risk management and governance.
"Institutional investors are extremely interested in risk governance in companies in which they invest as equity investors, but it is equally important for them to think about their own risk governance," Ms. Rahl said.
The survey was conducted over two weeks ended July 20. Commercial banks, investment banks and insurance companies were also among those surveyed.
August 2010
Financial Regs: A Top Concern for Institutional Investors
By Paula Vasan
Preliminary findings by Capital Market Risk Advisors show 37% of executives at pension funds, sovereign wealth funds, investment management firms and other institutional investors believe the financial reform act signed by President Barack Obama July 21 will make the financial market system safer.
The firm's 2010 Risk Concerns Survey, which was conducted over two weeks, closing July 20, found that US respondents ranked "government changing the rules" as their chief concern for the year ahead. Market volatility and credit losses tied for their second highest-ranking concern. Additionally, risk due diligence by clients, regulators and rating agencies increased by 54%, 64% and 44% respectively.
"It is disappointing but not surprising that 'Government Changing the Rules' remains the #1 concern for U.S. participants for the 2nd year in a row," said Leslie Rahl, Managing Partner of CMRA, in a statement.
CMRA's findings were based on risk-related concerns, including risk budgeting, risk appetite statements on limits and liquidity, stress testing. The firm plans to release the full survey August 2nd.
July 2010
Reform not a hit with institutional investors — survey
By Barry B. Burr
Thirty-seven percent of executives at pension funds, sovereign wealth funds, investment management firms and other institutional investors believe the financial reform act signed by President Barack Obama July 21 will make the financial market system safer, according to preliminary results of a survey by Capital Market Risk Advisors, a risk advisory firm.
Its 2010 Risk Concerns Survey found U.S. respondents ranked "government changing the rules" as their chief concern for the year ahead. Tied for their second highest-ranking concern were market volatility and credit losses.
Among non-U.S. respondents, market volatility and credit losses tied as their top concern, with government changing the rules in third.
"The general consensus is the financial reform bill isn't necessarily going to solve the problem," Leslie Rahl, CMRA managing partner, said in an interview. "And even though the bill has been passed, there is lots of rulemaking to be done. The devil is in the details in figuring out how the new regulations will be implemented."
CMRA plans to issue the full survey results Aug. 2, Ms. Rahl said.
The survey was conducted over two weeks, closing July 20, on risk-related concerns, including risk budgeting, risk appetite statements on limits and liquidity, stress testing.
July 2010
From Kirsten Bischoff, Opalesque New York:
While US legislators work to put together a bill that will merge the Restoring American Financial Stability Act of 2010 with the Wall Street Reform and Consumer Protection Act of 2009, corporate governance is expected to see increased oversight on compensation, voting rules, proxy access, and corporate structures. However, some of the biggest challenges facing corporate boards in 2010 are the same challenges that many failed at in the run up to the 2008 financial crisis and will not be necessarily be affected or improved by new regulation.
In one of the panel discussions to be held this Friday (June 18) during the IAFE Annual Conference, the talk will focus on "Should Boards Do More?" Led by IAFE Board of Directors member and Founder and Managing Partner of Capital Market Risk Advisors (CMRA) Leslie Rahl, the discussion will center around the perceived top challenges for corporate directors during the next year and the importance of how a firm’s view of risk management is integrated with its business.
"If you look at the crisis that we went through, the things that really damaged firms were the lack of liquidity, lack of transparency, complexity and a whole series of soft factors that generally do not get calculated into the risk metrics," she says.
Rahl says that while there were companies who understood the importance of deep risk analysis prior to the global financial crisis, those that did not have learned its importance and are beginning to widen their view of what contributes to their risk.
"I happen to believe that when people talk about risk adjusted compensation, they take too narrow a view of risk," she says.
In fact, CMRA offers on its website a list of the "galaxy of risk" that firms are exposed to.
In addition to acknowledging the wide scope of risk firms must deal with, Rahl also says that boards should define their approach through a risk appetite statement. "A risk appetite statement is one tool that has become very important. Some statements are not sufficient though, because not only should they quantify the risks but they should also help investors understand what a firm’s attitude is towards risk."
"When you are asking what the ramifications are if someone goes over their limits, you will often get a different answer depending on how the question is phrased and the question should be asked both ways: What are the ramifications if a person goes over their limit and makes money? And, what are the ramifications if a person goes over their limit and loses money?" Rahl says.
Even though it is not expressly addressed in new regulation, developing a corporate level approach to risk management is fast becoming a requirement for firms due to investor pressure. "The analyst community is asking more questions about these topics – about the role or the board and the role of oversight," she notes.
For more information on the IAFE Conference: The Truth About The Crisis or a Crisis of Truth (June 18th at Goldman Sachs at 32 Old Slip, New York, NY) visit: www.IAFE.org
June 2010
AXA Firings Top $500M After Reporting Failure
By Scott Johnson
Many of the facts surrounding the issues at AXA are still publicly unknown, says Peter Niculescu, a partner with New York-based Capital Market Risk Advisors, which provides risk advisory services to pensions, law firms and financial institution. Still, the episode highlights the importance of maintaining clear procedures surrounding risk and disclosures.
Niculescu says firms should always follow up any changes to a complex quantitative model with "a rigorous process of testing and backtesting to ensure that there's very little chance that errors like this can creep into production." And firms should embrace policies that encourage the communication of bad news or errors throughout the organization. "You don't shoot the messenger," he says. "You reward the messenger."
But when it comes to disclosing problems to clients, Niculescu recommends one simple rule. "If doing the disclosure externally makes you feel uncomfortable, then you should probably be doing it," he says.
April 2010
Manager Punished for Failing to Report Error
By Scott Johnson
Consulting firm Wurts & Associates is recommending its clients immediately terminate AXA Rosenberg across all of the firm's products, after the equity manager waited six months to disclose a serious glitch in its quantitative investment process. Wurts says the firm has still not offered a satisfactory explanation.
The situation is "quite an unusual occurrence" in the asset management space, says Peter Niculescu, a partner with New York-based Capital Market Risk Advisors, which provides risk advisory services to pensions, law firms and financial institutions.
"It's impossible for an outsider to assess how serious the issue is because we don't have the facts as to what the quantitative implications are," he says. "All that we really know is that AXA is according the issue due gravity. Given the elapsed time, that seems like it's appropriate."
April 2010
Role of Bond Insurer ACA at Heart of Government's Case
By Serena Ng
A small bond insurance company that imploded after taking on too much exposure to subprime mortgages is at the center at the government's case against Goldman Sachs Group Inc.
"If ACA performed an independent analysis and concluded that the [Abacus] portfolio met ACA's criteria, I'm not sure what the issue is," says Leslie Rahl, president of Capital Markets Risk Advisors, a derivatives and structured finance consultancy in New York.
In essence, "one sophisticated market participant thought that the portfolio was a good 'buy' and another a good 'sell' -- that happens all the time in financial markets and is what makes markets," she adds.
April 2010
Mortgages: A market to prop up
By Suzanne Kapner
The market for privately financed mortgages is unpredictable and, as the past couple of years have shown, can dry up. For "jumbo" mortgages – those in excess of $417,000 that are generally too big for Fannie and Freddie to purchase – financing is very difficult to obtain and borrowers are being required to put down as much as half of the loan value
"With less government support, mortgage rates are likely to rise and credit is likely to become less available," says Peter Niculescu of Capital Market Risk Advisors, a financial advisory firm.
March 2010
Fed carrying losses from Bear portfolio
By Henny Sender in New York
The US Federal Reserve is sitting on significant paper losses on the real estate assets it acquired in the Bear Stearns rescue, with much of the red ink coming from debt used to back some of the most high profile buy-out deals of the bubble years.
Peter Niculescu, the former chief business officer of Fannie Mae who is now with Capital Markets Risk Advisors, said he nonetheless believed that the Fed could have used more demanding criteria.
February 2010
Navigating Post-Crisis Dynamics
Directors duty at the brink of insolvency, the importance of liquidity, the shortfalls of GAAP
The capital markets presented public company board directors with a variety of vexing issues in 2009. Leslie Rahl, founder, Capital Market Risk Advisors, suggested that the "next great front" for financial firms and banks, in particular, "is for boards to figure out what its risk appetite and risk attitude is and how to communicate that to management."
"Ask the real simple questions: what could go wrong?" suggested Rahl.
February/March 2010
