Risk management and compliance for hedge funds migrate to the front office – Risk.net

Risk management and compliance for hedge funds migrate to the front office – Risk.net.

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Knock Knock Knock or Tap Tap Tap?

Relativemoney's Blog

We can debate hours about the good the bad and the ugly  of the monetary policies implemented by the ECB, the BOJ and the FED the last few years. Anyway, what we need to keep in mind is that any action…. provocate some reaction at some point in time.

The QE experiment has shown that there has been a clear correlation between the POMO days and the SPX index return but as we all know.. correlation works until one day… they break down.  Acually the last few years have been very interesting in breaking down correlations and market behaviors which could help us determine some course of action we could take and i can say that on my side I have misread several signals a few times (hopefully more missing opportunities rather than losing hard).

Anyway… what I observe and find interesting about QE is that it seems that we…

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Buy Vs. Sell-Side Risk Information : Time to Differentiate between “Your Risk” and “My Risk” Reports ….

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Well we all are accustomed to reading “Buy” and “Sell-Side” Investment Evaluation Reports prepared by Financial Research Analysts at various FIs such as Investment Companies operating in the Financial Markets.

However there seems to be very little focus on developing customized “Sell-Side” Risk Reports for clients at several Financial Institutions such as Brokerage Houses or Asset Management Firms.

The FIs don’t seem to promote this sort of risk information sharing culture at their end. The maximum they do, is that they add a “Risk Warning Chapter” and/ or “Legal Disclaimer” in the product / service brochure  to avoid legal consequences of their actions.

In USA the Investment Banking and Research Divisions are separated from one another in an effort to control unethical investment recommendations and practices. However the SEC neither in the USA nor anywhere else argues in favor of developing exhaustive “Sell-Side” Risk Reports which would lead to full disclosure of information both at the Retail and at the Corporate Levels.

“Buy-Side” Risk Reports have been in business for a long time. Most of the firms that maintain Middle and/ or Front Office Risk Desks, are also developing various kinds of reports that are used to assist both the Fund Managers and IC – Investment Committee Members. These reports are also used by auditors to develop an “Audit-Trail” to investigate various risk recommendations that may or may not influence the overall investment decision making processes.

However I would like to recommend to all FIs and especially Risk Managers to assist the business development side of operations by developing appropriate risk -reports for clients which may influence the sales outcome in a more transparent manner. The “Risk Desk” should train Sales Team and the Marketing Blokes to sell products and services based on risk recommendations. 

However Most of them want to but they are not allowed to do so! that’s another tragedy which I don’t want to touch in this blog. ;(

So my point of view is that very few untrained  “Sales People” at FIs know how to calculate and interpret Financial Risk Information. Hence how is it possible for them to communicate relevant findings to their Institutional or Retail (Household) Clients ? 

Just not possible eh! ?? …………….. Right it’s not !

What I argue is, that “Sell -Side” Risk Reports should come up asap in the Industry. The basic difference between the latter and the conventional “Buy-side” Risk Reports should be in terms of addressing their audiences separately and respectively.

“Buy-Side” Risk Reports are normally made for “internal-staff” members such as Auditors, Investment Managers, Economists, Product Developers, Financial Engineers, CFO, CIO, CEO and so on etc. . The “Sell-Side” Risk Reports should meet all client risk informational requirements in an exhaustive manner.

So we ought to clearly draw a line between “MY RISK” which are the Buy Side Risk Reports and “YOUR RISK” that are the Sell Side Risk Reports!

“My Risk” are Financial Risks that an FI interfaces and accepts at the internal decision making level and “Your Risk” are Financial risks which  (the client) experiences as a result of product or service sold to them via any financial institution.  Period!!!

Its just as simple as this!! No rocket science to it…

Ostensibly one may increase or decrease the dept of information that is added within such risk reports based on client background and interests. You wont be normally sharing ETL- Extreme Tail Loss Movements and GARCH (1,1) Model Estimation Methods with your Retail Clients.

That doesn’t make sense from a Marketing Perspective, right ??? ………..

But what you would want to share are basic risk indicators such as credit ratings, basic asset volatility parameters, discount factors used to calculate NPV and basic stress test forecast results etc.  The usual FRM Industry standard stuff done in layman’s language!!

“Sell-Side” Risk Reports should ideally contain all the necessary product specific Credit, Liquidity, Operational and Market Risk Data Outlook and Recommendations. Such reports should be prepared solely  for client education and information purposes by the relevant Risk Desk in conjunction with the Sales Team Members.

The reason why many American Bank clients lost so much of money and personal assets during the recent financial crises was because they didn’t have upto-date Product Financial Risk Outlook and Information. Investment Banks on the Wall Street such as Goldman Sachs and others were not providing full disclosure to product end-users and counter-parties! I remember how one Congressman  quoted a Goldman Trader from one of the emails brought under Federal Investigation Scrutiny during the Congressional Hearings => “That was one shitty deal  we sold” ………………….well  that phrase says it all! it tells you how the clients were being abused by the big banks.

 

Just to make matters worse, these Wall Street banks were upto something far more nefarious. They were doing “reverse betting” against sold client positions!!

Unethical……….Terrible ………………horrible!! ;(

This all wouldn’t have been possible had “Sell -Side” Risk Reports been in business at that point in time. Its easier for an educated client to understand the difference between “good” and “bad” volatility and ask the broker to shut up his buy-side calls during extreme market downturns !

Don’t know how Investment Banks in the US and other places were selling such high risk deals to their customers and how they got away with it?

You may do it with a retail customer but how they were able to fool the Institutional clients is a glaring example of Systemic Regulatory let down. This kind of blatant financial robbery and debauchery didn’t stop and strip there and then!

Even most of these Investment Banks and Hedge Funds that were selling/trading CDOs, CMOs, CDS, CFOs, CLOs and “God” knows what other Exotic Credit Derivatives, were able to further hedge and roll-over their positions by buying protection from other financial market firms such as AIG Financial (subsidiary of AIG) and similar Insurance firms in the USA.  Thereby creating a Global Systemic Risk and Financial Contagion, as seen during the Global Credit Crises back in FY 2007!

Similarly in the UK, the top four British Banks and their Investment arms were busy doing “Financial-Engineering” using American Sub Prime Mortgage underlying asset as Hot Deals. The returns were fantastic and so were the bonuses for the fund managers. In the end you know what happened. 

Everything and anything sold!

The “Toxic- Mortgage Backed Security” Financial Services Industry made $$$ money in trading like anything.  You couldn’t have earned a higher “Alpha” in the “CITY” or on the “Wall Street” doing anything else. All the traders had to do was to Package High Risk Securitized Loans / Mortgages together as a portfolio of investments and enjoy the short term abnormal yields / profits.

So going back to the basic argument!

Had the banks and other financial industry firms been able to abuse themselves, their clients and other countless number of counter-parties (including regulatory agents), if there had been some kind of “Sell -Side” Risk Reports circulating in the Industry?

Definitely the word would have gone out and caused great embarrassment! the “CASINO ECONOMY” ought to have busted much earlier.  But unfortunately there was no such wide spread practice to prepare “client level” Sell Side- Risk Information / Full Disclosure Reports as evidence and events suggest to us.  Yes they were “Buy-Side” Risk Reports, which were prepared for BRMC – (Board Risk Management Committee) Members, Fund Manager and/ or Traders in the Front Offices.

But ofcourse that didn’t help to create any kind of “risk awareness” at the appropriate levels!! 

So I believe the time has come for the industry to develop more customer focused Sale-Side “Your Risk Reports” and effectively impart Risk Management knowledge through Training Programs to those Sales Team Members, who are in charge of selling the business of  Financial Risks to both Retail and Institutional Level Clients across Global Financial Markets.

Your feedback is always welcomed!

 

 

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Managing Investment Risk

Just because you take investment risks doesn’t mean you can’t exert some control over what happens to the money you invest. In fact, the opposite is true.

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Multi-asset risk measures.

We study risk measures for financial positions in a multi-asset setting,
representing the minimum amount of capital to raise and invest in eligible
portfolios of traded assets in order to meet a prescribed acceptability
constraint. We investigate finiteness and continuity properties of these
multi-asset risk measures, highlighting the interplay between the acceptance
set and the class of eligible portfolios. We develop a new approach to dual
representations of convex multi-asset risk measures which relies on a
characterization of the structure of closed convex acceptance sets. To avoid
degenerate cases we need to ensure the existence of extensions of the
underlying pricing functional which belong to the effective domain of the
support function of the chosen acceptance set. We provide a characterization of
when such extensions exist. Finally, we discuss applications to conical market
models and set-valued risk measures, optimal risk sharing, and super-hedging
with shortfall risk.

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New Rules, Products lay groundwork for Nigeria Islamic Finance sector

Nigerian Islamic Finance Market

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Nigeria is gradually opening up to Islāmic finance, a move that could bring non-interest banking to over 80 million Muslims and develop one of Africa’s fastest-growing consumer and corporate banking sectors.

Nigeria, home to the largest Muslim population in sub-Saharan Africa,  is trying to establish itself as the African hub for Islāmic finance, which follows religious principles such as bans on interest and gambling.

In recent months, a string of regulatory initiatives have set the groundwork for products such as Islāmic bonds (sukuk), insurance (takaful) and interbank lending products, although there is still only a small number of local market participants.

“The potential is there but the market is negligible in Nigeria because we have only one Islāmic bank and one window-but it has potential to grow”, said Bashir Aliyu Umar, special adviser on non-interest banking to the central bank governor.

Islāmic banking is currently offered by the Islāmic window of Stanbic IBTC, a unit of South Africa’s Standard bank and Jaiz bank…

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Comparison between Basel II/III and Solvency II

 

The aim of this paper is to conduct a comprehensive but concise in-depth comparison between Basel II/III and Solvency II

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