Risk Governance

CMRA is a leader in promoting good risk governance. In addition to our subject matter expertise, Leslie Rahl is a member of the Board of Directors of two public companies, chairs the Risks policy and Capital Committee of one of them and is a member of the Risk Committee of another. She has also served on the board of the MIT endowment, the Advisory Board of the NYS Common Retirement Fund, the ISDA Board, the IAFE Board and the Boards of several not-for-profits. She attended the Executive Education Governance Program at HBS in 2004.

Ms. Lucas, was General Counsel to what was then known as Citicorp's Investment Bank, with responsibility for oversight of all legal and compliance functions in Citi's wholesale securities, commodities, derivatives, structured finance and foreign currency businesses in the U.S. and OECD countries.

Selected Risk Governance Assignments

• Advised several clients on Chief Risk Officer (CRO) roles, responsibilities and selection.
• Advised the Board of Directors of one of the largest non-US plan sponsors on risk managers
• Conducted a training session for the Board of Directors of a large mutual fund complex on risk governance
• Developed derivative guidelines for a large US corporate pension fund
• Advised the Board of Directors and Senior Management of a large European bank on measurement for all financial transactions including derivatives
• Drafted and reviewed risk management policies and practices for numerous buy and sell side firms
• Advised several clients on a charter for a Risk Committee of the Board
• Trained boards of several public pension funds in risk budgeting techniques
• Conducted on economic capital survey of 40 financial firms
• Assisted a major investment bank in formulating a "Risk Appetite Statement"
• Drafted expert report in Delaware Shareholder derivative suit raising issues concerning redemption of several classes of preferred shares
• Advised several firms on the structure of their Risk Management Governance Committees
• Engaged by a Japanese firm to provide in depth research on risk management practices of major banks and investment banks

CMRA in the Press re: Governance

Risk Management Gains Higher Profile
By Beagan Wilcox

As losses stemming from defaults on subprime mortgages ricochet through the financial markets, It has become apparent that some financial institutions with strong, well-integrated risk management programs skirted some of the worst damage.

Another risk-focused group, The Buy Side Risk Manager Forum, issued a report February that calls attention to "risk governance" as an important part of effective overall risk management.

The forum is made up of heads of risk management and chief risk officers from asset management and investment advisory companies.

The forum's report "Risk Principles for Asset Managers," states that risk governance refers to "the creation of checks and balances through organizational structure."

With the caveat that risk governance structures will vary depending on the size and complexity of the organization, the report provides five risk governance guidelines that lay the foundation for effective risk management:

• "Establishment of organizational checks and balances, including an appropriate segregation of front/back and/or middle office functions;
• Creation of a culture in which understanding and managing risk is everyone's responsibility;
• Independent control groups, including, where possible a risk manager reporting and/or having access to the [chief administrative officer], [chief executive officer], Board, Executive Committee or the like;
• Senior management and board level understanding of risks, definition of risk tolerances, and setting of risk management and ethical tone;
• An organizational structure in which risk management roles and responsibilities are clearly defined, including written policies and other procedures identifying the specific people within the organization who are authorized to approve various actions, make exceptions to various policies, etc."

The report cites a recent survey of mutual funds conducted by the ICI, which states that "the vast majority" of fund groups do not have chief risk officers, but that there is a "growing trend toward creating such positions."

At the same time, independent fund directors should assure themselves tat the risk management programs of the funds they oversee are adequate given their trading strategies and investment objectives, says Barbara Lucas, partner at Capital market Risk Advisors (CMRA), a consulting firm that works with various financial entities, including mutual funds, to assess risk.

CMRA worked with the Buy Side Risk managers Forum to draft the report n asset managers' risk principles. Lucas suggests that boards ask their management trams to look at the principles, which are not prescriptive, and assess where they stand versus the principles. They should then lay out their plan as to which ones they aspire and which ones are not.
(April 8, 2008)

Buy-Side Group Outlines Risk Management Best Practices

NEW YORK - Governance, investment and operations personnel in the securities and investments industry will have all to adhere to certain principles to best manage risk, according to the Buy Side Risk Managers Forum and Capital Market Risk Advisors (CMRA), a consultancy.

The forum, a group of heads of risk managements and chief risk officers from traditional buy-side asset and investment management firms, recently issued a set of risk principles within each of these three areas, titled "Risk Principles for Asset Managers."

"This piece is an important update "says Leslie Rahl, President of the consultancy CMRA and a member of the forum. "Risk management is a journey not a destination. It's something that keeps going and keeps needing updates."

Governance risk principles concern organizational structure and oversight mechanisms, including the importance of independent controls, segregation of functions, senior management involvement in risk management and oversight and adoption of appropriate policies and procedures.

Investment risk principles relate to the need for risk controls at the portfolio level, and address market risk, liquidity risk, leverage, valuations and other aspects.

Operational risk principles concern risk occurring in the ordinary course of business and in disasters. These address identifying, assessing and monitoring such risks, setting up adequate systems and minimizing manual processes, managing counterparty credit risk and assuring business continuity in a disaster.

"These principles recognize the broader function for risk management, which is not just computing the numbers and tracking the limits, but the proactive functions that help firms optimize the relationship between risk and rewards," says Rahl. "The emphasis on governance has evolved. The focus on governance is clearly something that the regulators are looking for and where the industry is evolving. The principles should provide an important framework for best practice risk management. The discussion of risk governance and valuation are particularly critical in today's market environment."
(March 17, 2008)

The multibillion-dollar question: Who's minding the shop at CIBC?

Leslie Rahl has an impressive resume'. She's founder and president of Capital Market Risk Advisors, a firm that, in its own words, has "played an integral role in the evolution of hedge funds, derivatives, structured securities and risk management for more than 15 years.

Ms. Rahl has given 35 years of her life to high finance, 19 of them at Citibank, including nine as co-head of Citibank's Derivatives Group in North America where she pioneered the development of the swaps and derivatives business. She graduated at MIT and its Sloane School of Management.

So she sounds like a perfect, if late, addition to Canadian Imperial Bank of Commerce's board of directors. Ms Rahl joined the board in May of this year, so don't blame her for the bank's most recent cock-up. But what about the other members of the board, and in particular the risk committee Ms. Rahl sits on? What burden of responsibility should they shoulder for CIBC's latest costly blunder?

CIBC says its board is meant "to supervise the management of the business and affairs of CIBC. The quality and independence of the directors, as well as adhering to high ethical standards, are critical to fulfilling the board's oversight obligations."

Ms. Rahl did speak about risk in general. Her advice to directors: "Ask tough questions." One hopes her appointment is more than window-dressing, that it shows the bank is serious about the mandate it givers the board. She has those credentials, after all. But you need more than that, apparently, Ms. Rahl is also the chair of the risk committee over at Fannie Mare – a lender whose subprime writedowns might go as high as $14- billion (U.S.), according to Barron's.
(December 31, 2007)

Amassing your governance capital
By Alice Korngold

On a nonprofit board, you will work with others to develop the organization's greater vision, revenue model, and case for support. Leslie Rahl, president of Capital Market Risk Advisors, points out that "you deal with matters of ethics that transcend what you learned in business school. You learn the dynamics of being part of a team of peers, of knowing when to defer to others, especially in situations where you are also ultimately responsible and accountable."

Rahl was asked to join the board of Fannie Mae in 2004. Her firm specializes in risk management, hedge funds, financial forensics, and derivatives, and she has authored books on hedge funds. She has an undergraduate degree from MIT and an M.B.A. from MIT's Sloan School.

Clearly, her business expertise qualified her to serve on the Fannie Mae board, but it was her nonprofit board experience that distinguished and elevated her as a candidate. "When they were interviewing me for the position," she explains, "the Fannie Mae board members spent a great deal of time asking me about my work on the board of 100 Women in Hedge Funds and my experience in chairing its philanthropy committee in particular." She adds, "Once I was identified for the Fannie Mae board, and my business qualifications were dear, my having served on a nonprofit board was definitely considered a plus."

Business background may open the door, but leadership experience gets you into the boardroom. Rahl was recently elected to the board of CIBC, a leading North American financial institution Hedge funds vary widely in the quality of their internal controls and disclosures, said Barbara Lucas, a partner at Capital Market Risk Advisors, a financial advisory firm. When it comes to the quality of hedge fund operations, "we see the good, the bad, the ugly and the indifferent," said Lucas, a longtime securities attorney. "It's really all over the place."
(Third Quarter 2007)

Where the jobs are: Chief Risk Officers
By Suzanne McGee

"Businesses need to be able to take risk in order to make money, but they need to know how to do so wisely," says Leslie Rahl, founder of Capital Market Risk Advisors, a New York-based consulting firm. Ms. Rahl, who is often consulted by headhunters or chief executives seeking a chief risk officer, says she sees the role as just as important as any other top-level executive position.
(May 4, 2005)

Corporate Governance
The Great American Corporate Director Hunt
By Susanne McGee

It's never been more vital - or harder - to attract qualified independent directors. Who needs the hassle? Yet good corporate governance depends on how companies cope with today's director shortage.

For more than two decades, Leslie Rahl had made her living analyzing risks, but she never come across one quite like this: In December 2003, Fannie Mae approached her about taking a seat on its board of directors

Rahl was honored, and in many ways she was the perfect candidate for the now-troubled mortgage lender. A star options trader for Citibank in the 1980s, she had opened her own consulting shop, Capital Market Risk Advisors, in 1994 and was soon counseling Orange County, California, on how to handle $2 billion in derivative market player, needed a financial expert on the board to replace former Goldman, Sachs & Co. chairman Stephen Friedman, who was leaving to join George W. Bush's administration as director of the National Economic Council.

But Rahl was also a little worried. She had never been a public-company director before, and the previous few years of corporate scandals and strict new regulations had refined then nature of board service, turning what had often been a cushy networking opportunity into a high-risk endeavor. Congress's quick response to frauds at companies like Enron Corp. and WorldCom – the Sarbanes-Oxley Act of 2002 – had heaped unprecedented legal and financial responsibilities on board members. Regulators, activist shareholders and trial lawyers increasingly were targeting directors for failing to question or prevent corporate misdeeds. Complicating things further for Rahl, federal regulations had just announced and examination of Fannie Mae's accounting practices following the company's disclosure of a $1.1 billion error in its third-quarter earnings statement.

So rather than accept the position right way, the risk expert embarked on several weeks of painstaking due diligence. She spoke with other Fannie Mae directors, scrutinized the company's financial statements going back several years and even asked her husband, a bankruptcy lawyer, to vet the offer from a professional perspective. After two months of checking out the company, she agreed to join its board. (Since then the accounting probe had prompted a huge earnings restatement and the resignations of Fannie's CEO and CFO.)
(April 2005)

Bite the bullet on governance
By Leah Nathans Spiro

You've heard it here first: corporate governance will be the next big issue to hit hedge funds. The industry is wide open to criticism on this front. Word to the wise – jump on the bandwagon early, because soon you will be hearing about it from institutional investors and regulators.

For hedge funds, corporate governance usually translates to the following: Is there any independent oversight and standards in important areas such as valuation of assets? Usually this boils down to whether a fund has a board, and whether that board has independent directors. Another issue – does a hedge fund have a compliance structure and procedures that provide genuine checks and balances to the gunslingers out on the trading floor?

When it comes to corporate governance, hedge funds are clearly still in the Dark Ages. Most hedge funds do not even have boards, independent or otherwise, says Barbara Lucas, a partner with Capital Market Risk Advisors, a New York management consulting firm.

Of course, there's a good reason for this. The structure of the hedge fund industry never called for boards. Hedge funds are not public companies, but are by large limited partnerships run by general partners. "They can be organized by one person and have shareholder agreement and have all the powers in a corporation would belong to a board." says Lucas. "Or they are limited partnerships managed by a general partner, not a board. The legal structures are different."

Hedge funds are trading and investing entities built around the powerful personalities of their founders. It is an industry that is so entrepreneurial and has grown so quickly, and people with trading backgrounds are interested more in trading strategies than organizational and structural issues." says Lucas.

But Lucas thinks pressures from institutional investors will grow. "I do see the possibility that there would be increased concern by major institutional investors that would cause funds to beef up their governance practices," she says. Some funds have advisory committees of outside people who meet periodically. It ‘s not commonplace yet."

Yet it is starting to happen. "I have been hearing stories about people beefing up, putting in advisory committee structures and getting real live directors, says Lucas, who would not be persuaded to name names.

Even if a hedge fund has a board, its probably packed with cronies," says Lucas. "The kind of people you want to see are independent, not vendors to the fund in question, or people with ongoing business relationships. What you also look for is people with market knowledge."

"If you have group of group of friends of the administrator in the Cayman Islands wouldn't understand the impact of some trading development, that's not the kind of director you want. You want someone who can ask questions."

Says Lucas: "Increasingly, the things that are customary in other parts of the financial services world and asset management world point to an underlying logic that applies whether you're registered or not."
(November 2004)

Risk Pro for Fannie
By Barbara A. Rehm, Robert Julavits, and Geeta Sundaramoorthy

Fannie Mae is adding former Citigroup Inc. banker Leslie Rahl to its board of directors, filling the seat formerly held by Goldman Sachs & Co. alum Stephen Friedman, who joined the Bush administration as the director of the National Economic Council in late 2002.

As the president and founder of Capital Market Risk Advisors Inc., Ms. Rahl specializes in risk management and capital markets strategy. She previously ran her own consulting firm, Leslie Rahl Associates, which concentrated on swaps, options and derivative products.

Her years at Citi stretched from 1972 through 1991; she rose to co-head of the company's North American derivatives group. She holds two academic degrees, including an MBA from Massachusetts Institute of Technology.

"Leslie Rahl's experience in the financial markets and her understanding of the derivatives markets will bring us an extremely broad range of skills, which will benefit our board, senior management, and our company as a whole," said Franklin D. Raines, Fannie's chairman and chief executive, in a news statement. "Leslie has a keen understanding of financial markets and an interest in the mission of Fannie Mae, and we look forward to benefiting from her expertise."
(February 20, 2004)