Risk Advisory

Your Lifeline in a Risky World


Risk Advisory Services

CMRA's principals and senior professionals each have over 30 years of experience and have been involved on the front line of every facet of the derivatives and structured finance business from trading to risk management to new product development to origination to documentation to legal issues since 1983. Our services span the "galaxy of risk."

Our experience spans all manner of financial instruments and asset classes, including: swaps, options, exotics, MBS, ABS, CDO, CLO, CDS, Futures, TRS, Currencies, Structured Notes, alternative asset classes, Treasuries, corporate bonds, repo and municipal securities.

We have experience serving on and advising Boards of Directors and risk committees. We have spent many years working with and training regulators and auditors.

We are able to use the knowledge gained from previous market disruptions as well as from our litigation support and investigation experience as to what has "gone wrong."

Our practical experience is central to our being able to provide real world solutions to risk management and governance challenges.


Selected Services

Risk Measurements, Stress Testing, and Value at Risk (VaR)

  • We have years of experience both receiving and designing integrated risk, performance, and attribution reports that not only convey standard risk metrics, like VaR, but also have "context" that allows for a comprehensive view of a financial institution's myriad risks in light of its business opportunities. Our senior professionals are thought leaders when it comes to clients' interpretation and reliance on stress testing and risk metrics and have consistently delivered key insights on trends and exceptions in today's risk enterprises. We are well positioned to advise clients on CCAR, FRTB-related recalibration and implementation, and shortfall risk.
    • Conducted independent risk assessments for many traditional and alternative investment managers
    • Evaluated stress testing implementation and risk management frameworks at multiple institutional clients, including pension plans, sell-side market participants, and GSEs
    • Served as experts in multiple investigations and litigations related to stress testing and risk measurement of complex financial products (CDOs, structured product, derivatives portfolios, etc.)

Risk Appetite Statements

  • Risk Appetite Statements help boards communicate to management a unified view of an acceptable risk profile. CMRA is a pioneer in expanding "Risk Appetite" statements to include "Risk Attitude" and is using interactive technology to assist both the Board and management in identifying areas of agreement and disagreement and creating a Risk Appetite Statement and creating a Risk Conscious Culture.
  • "A risk appetite statement is a simple way for a board to communicate its risk appetite and tolerances to management, and for a firm to communicate its risk appetite and attitude to its employees and stakeholders." - Risk Budgeting: 2nd Edition
    • Advised institutional investors, banks and broker dealers, insurance companies, and asset managers on the creation of Risk Appetite and Attitude Statements
    • Created a charter and organizational blueprint for the risk oversight function of a large commercial bank
    • Conducted an interactive risk appetite discussion for a board of a large pension plan, and used the results to create a customized risk appetite study

Policies & Procedure Reviews

  • "Say what you do and do what you say," aspirational policies are problematic
  • Written policies and procedures are a lynchpin of effective risk management, and often serve as the starting point for an organization's risk culture. We assist our clients by advising them on current best practices and industry trends, reviewing and updating existing policies and procedures, and drafting new policies and procedures for new business lines or to reflect evolutions in existing business lines.
    • Drafted and reviewed risk management policies and practices for a wide variety of market participants, including banks, broker dealers, hedge funds, pension plans, and institutional investors
    • Served as expert in disputes and litigation involving policy breaches, best practices, and market practice
    • Evaluated valuation policies for a range of sell-side and buy-side market participants
    • Benchmarked policies and procedures against best practices and provided gap analyses for a diverse set of financial institution clients

Risk Governance and Culture

  • CMRA is uniquely suited to assist our clients on risk governance as a result of our own experience as directors and trustees, as well as our extensive risk governance benchmarking and advisory work.
    • Served as expert in matters related to risk governance and culture in crisis scenarios, as well as best practices in governance and risk management
    • Conducted multiple surveys across a broad range of financial institutions to assess industry practice and trends
    • Advised pension plans, traditional and alternative investment managers, and banks/broker dealers on risk management structure, the role of the CRO, and risk management practices

Due Diligence (Hedge Funds, M&A, Private Equity)

  • Our team leverages its years of experience performing due diligence on alternative investment managers and M&A opportunities both to advise clients seeking to deploy capital and to counsel investment funds seeking to benchmark and improve their practices. Our specialized expertise in derivatives, structured product, and other esoteric asset classes allows us to assess a wide range of equity, fixed income, and hybrid strategies.
    • Performed due diligence reviews and "risk diagnosis" on hedge funds, fund of funds, and traditional asset managers
      • "While risk profiles are important, their importance pales in comparison to effective, ongoing due diligence and intelligent manager selection. The eyeball-to-eyeball approach is required and due diligence must be performed by someone not only knowledgeable in te underlying strategy, but also wise to the 'ways' of hedge fund managers and skilled at peeling the onion and probing deeply when needed." - Hedge Fund Risk Transparency
    • Advised banks, private equity investors, and insurance companies on acquisitions of both financial services businesses and portfolios of complex instruments
    • Evaluated OTC derivative and structured finance pricing, structuring and documentation, collateral valuation, and comprehensive transaction risk pricing for end user clients
    • Drafted standardized due diligence questionnaires for AIMA and provided due diligence training to both fund of funds and institutional investors

Risk Management, Compliance, and Oversight

  • CMRA is widely recognized for its expertise in all areas of risk management, and our principals have decades of experience as not only risk managers but also business managers. Our leadership role in establishing "best practice" allows us to provide expert advice to a wide range of clients, and our experience with clients on both the buy side and the sell side provides us with a unique perspective which we harness in approaching risk.
    • Performed comprehensive risk assessments and reviewed risk management policies and practices for a variety of institutional investors, banks and broker dealers, and investment managers
    • Advised the board and senior management of a fixed income broker dealer as an independent risk consultant
    • Diagnosed and reviewed multiple risk management crises, including Orange County and Bankers Trust

Enterprise Risk Management (ERM)

  • Enterprise risk management has taken a central role in the viability of many business strategies. The interconnectivity of existing and emerging risks poses a threat at not only the process and business unit levels, but also the enterpise level. CMRA has been at the forefront of the development of enterprise risk management tools, and has hands-on experience with strategy, culture, and execution of enterprise risk management objectives.
    • Advised multiple industry groups (such as GARP, IAQF, and the Mutual Fund Directors Forum) on best practices and risk principles
    • Served as experts on multiple commercial disputes involving enterprise risk management, including: risk disclosure and enterprise risk management during the great financial crisis, internal risk controls during rogue trading incidents, and risk management best practices
    • Reviewed, benchmarked, evaluated, and structured risk management practices for several banks, broker-dealers, and asset managers (hedge funds, fund of funds, institutional investors, etc.) - both at the operating level and at the board level

Model Validation

  • We have experience validating and interpreting model outputs to draw actionable conclusions and to understand the effects of model limitations. We focus not just on the math, but also on input control and assumption validation and have a knack for identifying potential Achilles heels. Clients call upon us to advise them on challenges that often necessitate a complex analytical framework, but also rely on us to communicate to them the limitations of any potential solution and to succinctly translate model results to layperson-friendly presentations and prose.
    • Independently reviewed valuations, risk models, and strategies involving complex instruments and structured cashflows for a range of financial institution clients
    • Vetted complex pricing and risk models for bank, broker dealer, and buy-side clients
    • Reviewed marks on CDOs in connection with a FINRA investigation

Key Risk Indicators (KRI), Dashboards, and Metrics

  • We have years of experience both receiving and designing integrated risk, performance, and attribution reports that not only convey standard risk metrics but also have "context" that allows for a comprehensive view of a financial institution's myriad risks in light of its business opportunities.
    • Assisted a number of buy-side clients with risk system selection, integration, and evaluation
    • Evaluated market risk management at both the business segment and enterprise levels for major US and European banks and broker-dealers
    • Assessed the VaR implementation and risk management framework of one of the largest non-US retirement plan sponsors

Board Education

  • Our perspective as board members, risk experts, traders/structurers and business managers uniquely positions us to advise and educate boards on issues from ranging from risk governance to risk-adjusted compensation.
    • Advised the Board of Directors of several large banks and insurance companies on derivatives and products with derivative-like features
    • Provided board education on lessons learned from previous financial crises as well as risk measurement and assessment
    • Trained the Board of Directors of several pension funds on risk budgeting techniques and best practices
    • Produced "translations" of risk reports to make them meaningful at the Board and CEO level

Linking Risk and Compensation

  • Our robust risk management practice helps us advise our clients on compensation issues. We update our clients on best practices with respect to risk-adjusted compensation and help them align employee incentives with the firm's risk and performance.
    • Acted as an expert in arbitration regarding appropriate risk-adjusted compensation for a long-dated exotic option.

Risk Branding

  • We have experience marketing the institutional-grade risk management that investors have come to expect from their fiduciaries. Our professionals can help you craft your narrative as you communicate your risk principles, capabilities, and culture to the outside world.
    • Advised major global macro fund regarding "risk branding"
    • Developed "risk branding" for several buy-side institutions

New Product Reviews

  • Our team leverages its collective experience as pioneers in various segments of the financial markets to advise clients on the risk management of new products and to help preempt future regulatory, business, market, and litigation risk with respect to those products. Whether clients are exploring products that are entirely novel or are simply entering new markets, we are uniquely positioned to deliver value both through our hands-on experience managing new products and through the lessons that we have learned from directly investigating products that have "gone wrong."
    • Evaluated the new product review process at several financial institutions as well as the criteria for identifying a new product vs. a variation on a theme
    • Assisted a major foreign insurance company in developing its plan to enter the US market
    • Developed innovative guarantee structure for a fund of funds
    • Advised insurance company boards on the risks of entering into new markets and of new retail products (such as variable rate annuities)

Valuations of Derivatives, Structured Products, RMBS, CDOs, CLOs

  • We help clients review valuation policies, review Valuation Committee role and charter, and also provide independent reviews of valuations.

Operational Risks and Controls

  • Operational risks and controls are crucial components of risk management that we help our clients navigate with the benefit of personal experience and a keen eye towards emerging trends.
    • Advised trading desks on marking of illiquid positions and aged inventory management
    • Served as expert witness in matters related to operation "best practices" for CDS as well limits and controls on the trading of exchange-listed derivatives

Counterparty Credit Risk, Collateral Management, and CVA

  • Counterparty credit risk and collateral management are essentials in the modern portfolio management toolkit. Our team has decades of experience managing counterparty credit risk and negotiating for risk mitigants such as collateral and structural protections. We are well-positioned to advise our clients on best practices, counterparty disputes, and emerging themes in counterparty risk management.
    • Served as experts in disputes involving Credit Valuation Adjustment (CVA) and Funding Valuation Adjustment (FVA)
    • Served as expert in litigation concerning margin calls and liquidation of exchange traded commodity futures and options
    • Quantified impact of counterparty credit risk through sophisticated analysis of appropriate CVA, and advised institutional clients on potential stress exposures to counterparty credit
Risk is not bad. What is bad is risk that is mispriced, mismanaged, misunderstood, or unintended
— Investment Financial Services Review (April 2002)

CMRA Galaxy of Risks

I foresee a day . . . when risk unit allocation surpasses asset allocation as a way to decide where to place investments
— (February, 1999)

CMRA and its Senior Practioners have been at the Forefront of Risk Management Since the Early 80's


The liquidity crunch brought home to many investors, portfolio managers, service providers and prime brokers how sharply valuations can diverge when a portfolio becomes unexpectedly illiquid...
"I was a diehard advocate for mark-to-market, and I still believe it's the lesser of evils, but there are times when model-based pricing might make sense," said Ms. Rahl. This would of course imply that the model-based methodology was favored over mark-to-market because either market prices were stale or unavailable, or the relationship between the underlying and the proxy was weak. "The option of using such a valuation methodology would require strict checks and balances within a fund," she said.
"Marks on the collateral don't necessarily represent the price at which a trade can be unwound," said Ms. Rahl. "In some situations we have seen the exact same trades with two different counterparties being unwound at vastly different prices."

- Hedgeworld (July 2008)

Leslie Rahl says "People put too much emphasis on asset diversification and not enough on diversifying the more subtle risk factors such sensitivities to volatility, to flights to quality, to credit, etc."

- CFA Magazine (July/August 2008)

...Clearly the interests of the solvent and bankrupt parties are opposite when it comes to valuing contracts for early termination, and not surprisingly it can become contentious. Leslie Rahl, president and founder of Capital Market Risk Advisors, a risk consultancy, said that "there's almost always a difference of opinion, breakage between the value that someone thinks they're going to receive and what they do [receive]. Even if you have two [originally] matched trades you're going to take them off at different prices." In other words, what looked like two sets of perfectly offsetting positions-a perfect hedge-may turn out not to offset once quotes have been obtained and the contracts terminated.

While the quote method would seem to be objective, depending on the liquidity of the market the results can still be dubious. "I've seen bunched quotes, three bunched together at one end, and two at the other, as though there's a significant difference of opinion among dealers." As a result, even after dropping the outliers, "you can still get a mishmash," Ms. Rahl said... 

- Journal of Global Financial Markets (Spring 2002)

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

- Federal Reserve Bank of New York Economic Policy Review (January 2000)

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.

- (September 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. 

- Derivatives Strategy (December 1998)

Capital Market Risk Advisors, warns that risk models based on historical default data could prove invalid for credit derivatives linked to syndicated loans

- BusinessWeek (July 1997)

Most derivative houses now provision for credit risk. But very few do so for liquidity. Leslie Rahl thinks the liquidity of underlying markets, or the lack of it, will be of increasing concern, forcing houses to provision accordingly. "In the same way people set aside reserves depending on the credit of the counterparty, I think you're going to have people set aside for liquidity. The reserve you'd set aside for a three-year US dollar interest rate swap would be quite different from CTE [Ecu Italian government bond] swaption" . . . A clearing house for OTC products could be one alternative: "I could easily envisage a clearing house in which, once a deal is done, a central margining credit-enhancement vehicle takes over."

- (December 1992)

When an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. "You can't rely on VaR as your only metric," says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. "We recommend people use three to five different metrics. It's like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things." ...
Rahl recommends applying stress tests to see how a portfolio would react to sharp drops, market shifts, unusual situations or changes in underlying assumptions. Stress-testing models, which are included in risk systems, can reveal weaknesses that a simple VaR test misses. But Rahl says too many financial firms continue to rely mostly on VaR. Back in April 2000, Rahl's firm conducted a survey of risk practices and found that 45 percent of financial firms, including hedge funds, were not using stress tests at all. Although she hasn't updated the survey, she says she has noticed only a slight improvement since then.
"In risk management only about a third is quantitative," Rahl says. "A third is still a big part of the puzzle, so it is quite valuable." The remaining two thirds of the puzzle is where good risk managers earn their money. Ultimately, an accurate forecast depends on knowledge, experience and chutzpah.

- Alpha (June 2008)

Last month, New York-based consultancy Capital Market Risk Advisors released a survey on economic capital allocation. It reported the economic capital allocated by large global banks to operational and other risks (but not market risk or credit risk) ranged between 5% and 60%.

 - (June 2001)

A recent survey of financial institutions has found that most are concerned with credit risk but are not accounting for liquidity risk...Many of the firms are also not applying risk-adjusted methods to allow for a more efficient distribution of capital...the survey [ Economic Capital Survey 05/01 ] which was conducted by Capital Market Risk Advisors..."It's purely based on attitude whether they use the risk-adjusted return method or not," says Leslie Rahl, president of CMRA

- (June 2001)

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.

- Euromoney (November 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."

- Alert Investment Risk (November 1999)

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

- Derivatives Strategy (December 1998)

VaR does not demonstrate the worst-case scenario

- Derivatives Week (January 1997)

VaR models contain inherent flaws. The biggest glitches surface on days when markets break free of normal patterns, smashing the neatly calibrated VaR volatility and correlation barriers. In recent months convulsions have racked both the CMO and structured-note markets, says Leslie Rahl, a risk consultant and a partner at Capital Market Risk Advisors: "During those market dislocations, the models Wall Street ran couldn't get a fix on what the value of the position was, let alone how much the value at risk was."

- Institutional Investor (February 1995)