Neil Brown Managing Director NoteWell Associates Ltd. [email protected]Asset Managers have been subjected to significant changes in the way that they are required to manage risk within their business. Some of these relate to Basel 2, but there is a responsibility to implement and evidence an enterprise wide risk framework that supports ICAAP. This can be complicated by the evolving approach to regulation of complex groups resulting in changing regulatory relationships for asset managers. This talk will address the issues involved in achieving this wider risk framework.
Transcript
Neil BrownManaging DirectorNoteWell Associates Ltd.
Asset Managers have been subjected to significant changes in the way that they are required to manage risk within their business. Some of these relate to Basel 2, but there is a responsibility to implement and evidence an enterprise wide risk framework that supports ICAAP. This can be complicated by the evolving approach to regulation of complex groups resulting in changing regulatory relationships for asset managers. This talk will address the issues involved in achieving this wider risk framework.
Slide 2
Mitigating Risk by Evidencing Risk Control
“ …..we will scrutinise proposals for new UCITS III funds and conversions of existing funds and will engage in a thematic review of the risk management of firms that are proposing to operate or are operating UCITS III funds.”
Hector Sants, 19th September 2005
Slide 3
….financial services regulators around the world are rightly concerned that the business and affairs of financial services firms are responsibly and effectively organised and controlled at senior management level and that firms’ senior management take responsibility for this
a firm is required to establish, implement and maintain adequate risk management policies and procedures which identify and set the tolerable level of risk relating to its activities and effectively manage those risks.
A firm also has to have a separate risk control function, where this is proportionate depending on the nature, scale and complexity of its business. This function will be responsible for assessing the risks that the firm faces and for advising the firm's governing body and senior managers on these risks.
Mitigating Risk by Evidencing Risk Control
Christine Sinclair 15th May 2006
Slide 4
Generic Risk Process
Define Risks the firm is prepared to take (Risk Appetite)
Identify risks the firm owns (to capital, reputation, earnings, brand….)
Categorise and identify the drivers of these risks (investment performance, market, credit, operational, event….)
Agree measurement techniques (attribution, VaR, stress testing, scenarios, other…)
Agree limitations of these techniques (Correlations, Fat Tails, model validity under stress…)
Design / Build / Implement systems and processes to capture this information
Set and operate appropriate controls (limits, delegated authorities, escalation processes
Apportion responsibility for managing these risks— Business management to own them— Risk management to provide oversight
Slide 5
Objective of the ICAAP
…with respect to capital adequacy….
How much and what composition of internal capital the firm considers it should hold as compared with the capital resource requirement (CRR) ‘pillar 1’ calculation , and
the adequacy of the firm’s risk management processes
Slide 6
Risk Framework
What are the risks?
Strategy
Earnings
Reputation (Brand?)
Investment Performance
Failure to deliver mandated product
— Includes TCF, Advertising…
Operational Risks
Legal & Compliance Risks
Slide 7
What Risks Should Be Considered for ICAAP?
Slide 8
Other issues?
Group Structures – strengths and weaknesses….
Outsourcing (and insourcing!)
Where applicable, details of any other business-unit-specific or business plan stress tests selected
Differentiation between ICAAP requirements and good business management….
Slide 9
ICAAP
Annual?
Risk types considered to justify “exclusion”?
Capital required to mitigate worst case occurrence
Not a process to manage the business….
Slide 10
An Appropriate Risk Management Infrastructure
Who owns this and why will it happen?
Senior Management
— CEO/SEO / Apportionment Officer
— SIAPs
If you don’t understand it, you shouldn’t be responsible!
Others
— Line Management
— All staff
Slide 11
What Is Involved?
TABLE OF CONTENTS Overview Governance
— Roles and responsibilities
— Definition of risks and risk appetite Risk Management Framework
— Risk and Control Assessment processes
— Incident Management processes Reporting and Monitoring
Company Risk Framework
Slide 12
Example: Roles and Responsibilities
Senior Management are responsible for implementing
— An effective and appropriate operating structure that has transparent and formal responsibilities including:
—implementing risk management frameworks within their part of business.
—developing and implementing processes and procedures for measuring and managing risk in all of the material products, activities, processes and systems of their part of the business.
—understanding and evaluating the risk profile and ensuring appropriate risk mitigation within their part of the business.
—producing reporting to demonstrate the effectiveness of the risk mitigation they have applied
Slide 13
What Does This Mean?
Much of this will exist, some is documented….
Document from the top down, pull all existing frameworks together……
Quality not Quantity (substance not form)
Ensure that Management Information produced by all areas can support the risk framework (evidences management control)
Slide 14
Reporting Structure
Risk ManagementMonthly / Quarterly reporting
Business area Heads / Senior ManagementMonthly / Quarterly Reporting
Chief Executive Officer
Business ActivityDaily/ Weekly/Monthly /Quarterly Reporting
— Is the proposal legal and are we allowed to build/distribute?
— Do all areas of the business understand what is required of them?
Slide 17
Product – Marketing Responsibilities
Clearly defined product characteristics
— objectives,
— sources of alpha / absolute return
— risk controls & characteristics
— fees and commissions
Clearly defined target marketplace
Clearly defined target sales and timescales
Clearly defined product review process
Compliant marketing materials
— Brochures / Applications
— IFA materials
— Advertising
TCF considerations
— Place in market
— Place in portfolio
— Family/friends…..
Internal External
Slide 18
Product Investment Management Responsibilities
Through what clearly defined investment process and risk controls & characteristics will they capture the alpha / absolute return to deliver the clearly defined fund objectives ..........
Credibility of how they will deliver consistent product/performance….
Ability to explain/demonstrate sources of absolute and relative performance (Attribution)
Ability to explain demonstrate current portfolio positioning/”bets” (risk analysis)
Slide 19
Middle/Back Office Responsibilities
What new systems or people are required?
On what platform / how will you
— price
— account
— risk measure
— report
What processes change as a result of this?
What manual processes are introduced?
What processes are special/different for this product?
Ensure continuity and disaster recovery
Slide 20
Risk Management Process
Investment Risk
Review proposed product characteristics versus proposed objectives / market / clients for “goodness of fit”
Ongoing review of the performance, attribution and risk analysis of product using appropriately designed statistics and techniques – still “true to label”?
Operational Risk
Ensure
—specific accountability, policies & controls, reporting at launch & ongoing
—segregation of duties at launch & ongoing
—Key Risks, Key Controls, Control Enhancements identified and addressed…
—Integrate into ongoing OpRisk reporting – enhance where necessary
Slide 21
Additional/Enhanced Processes.…?
Instrument / portfolio pricing
Instrument / portfolio risk analysis
Risk Management oversight
Management oversight
Board reporting
Slide 22
Who Owns What?
Product design
Investment delivery
Product support
Product launch
Oversight
Ongoing product life
Marketing / Distribution (/ Investment Management)
Investment Management
Middle/Back Office
CEO
Senior Management/CEO
— Legal/Compliance/Risk Management
All of above
but ultimately, CEO………..
Slide 23
Conclusions
Senior Management resolve is key
Don’t build the Bugatti Veryon *
— Model Bugatti Veyron 16.4 Engine type 7993cc, 16 cylinders in a W
Power/Torque 1001bhp @ 6000rpm / 922 lb ft @ 2200rpm
Performance 0-62mph: 2.5sec / Top speed: 253mphPrice £810,345Verdict Blows away all the other supercars
Set senior responsibilities and deliverables to drive framework down through the business
Ensure reporting is appropriate and evidenced
Having created this framework, be ready for internal/external review…* Source: Times Online
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