IMF forecasts the worst year post world war II will be 2009. Persons with savings can acquire equity share portfolios at probably less than fair values in this year.
Why so?
Because securities market intermediaries have suffered enough losses and do not have the means to acquire the securities at fair values. These intermediaries who used to buy first in both primary and secondary capital markets and then later on distribute to genuine buyers have no capacity now. The systems are broken in the markets. There is a big doubt in everybody's mind about the future. People do not park their money in assets. It is better to be in bank cash rather than to be securities.
That gives the opportunity to people with genuine savings to acquire some assets at less than their fair values. But the volatility in markets will be there and strain you. Benjamin Graham, the most conservative value proponent said after you buy, the market may go down by 50%. Can you still believe your value calculations?
Showing posts with label Risk-management. Show all posts
Showing posts with label Risk-management. Show all posts
Thursday, April 23, 2009
Monday, September 15, 2008
If you take the risk, you get expected return only
If you take the risk, you get expected return
Every security market investor, trader and intermediary should know this statement.
Don't jump in your seats if somebody says I have taken the risk and I made the money.
There were many who took the same risk and were in dumps. This is the man who became successful and exhorts everybody else to take the risk.
Unless you can manage the possible loss (loss will never be expected in a risky venture only profit is expected) don't take the risk.
The mighty investment banks like Merrill Lynch and Bear Stearns have lost their independent status.
Lehman filed for bankruptcy. Many hedge funds are folding up. Let people understand risk taking properly.
Every security market investor, trader and intermediary should know this statement.
Don't jump in your seats if somebody says I have taken the risk and I made the money.
There were many who took the same risk and were in dumps. This is the man who became successful and exhorts everybody else to take the risk.
Unless you can manage the possible loss (loss will never be expected in a risky venture only profit is expected) don't take the risk.
The mighty investment banks like Merrill Lynch and Bear Stearns have lost their independent status.
Lehman filed for bankruptcy. Many hedge funds are folding up. Let people understand risk taking properly.
Sunday, March 9, 2008
Risk Management - Books
1. Risk Management By Michel Crouhy, Dan Galai, Robert Mark
http://books.google.co.in/books?id=aQcV6Tr11w8C&printsec=frontcover&dq=risk+management&sig=cjOmUuGQxIRGd2zIsJmx5r6huYg
2. Value at Risk: The New Benchmark for Managing Financial Risk By Philippe Jorion, 2001
http://books.google.co.in/books?id=S2SsFblvUdMC&printsec=frontcover&dq=risk+management&sig=dp5VhnaWT3fANxk5PTjgZiJEUmk
3. The Fundamentals of Risk Measurement By Christopher Ian Marrison,
http://books.google.co.in/books?id=ndXkO0E3Of4C&printsec=frontcover&dq=risk+management&sig=sxk5x3-TEgcdS2niJiV12vvkoI0
4. Risk Management and Value Creation in Financial Institutions By Gerhard Schroeck, 2002
http://books.google.co.in/books?id=kjQ-rnunA98C&printsec=frontcover&dq=risk+management&lr=&sig=6TSlPn82GXTgLkAuh3IZYUdDe6g
5. Managing Operational Risk: 20 Firmwide Best Practice Strategies By Douglas G Hoffman, 2002
http://books.google.co.in/books?id=qBCegetwV0cC&printsec=frontcover&dq=risk+management&lr=&sig=2yi2e4EowxAECmk9gsE1xaE0NNc
6. Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency ...
by Richard Horwitz - 2004 - 275 pages
Hedge Fund Risk Fundamentals is the first book to bring these issues to the forefront.
http://books.google.co.in/books?id=lOYycMDPJKkC&printsec=frontcover&dq=risk+management&lr=&sig=6nboT-x7fkiVYIPs2g71kxoGuAY
7. Risk Management: Approaches for Fixed Income Markets By Bennett W. Golub, Leo M. Tilman, 2000
http://books.google.co.in/books?id=PIAI_dUHO-oC&pg=PP1&dq=risk+management&lr=&sig=SSOnwBwDre6zFMn-HXEjMeM-24M
8. Elements of Financial Risk Management By Peter F. Christoffersen
2003 - 214 pages
This book will appeal to practitioners in the financial services and investment industries, as well as graduate students and advanced undergraduates.
http://books.google.co.in/books?id=F5jtlULHNrwC&printsec=frontcover&dq=risk+management&lr=&sig=l0zJa_T7M6GjjIrhzz-f09GfYxM
9. Advances in Fixed Income Valuation Modeling and Risk Management By Frank J.Fabozzi - Business & Economics - 1997 - 391 pages
Advances in Fixed Income Valuation Modeling and Risk Management provides in-depth examinations by thirty-one expert research and opinion leaders.
http://books.google.co.in/books?id=UkzfNsO8l4gC&printsec=frontcover&dq=risk+management&lr=&sig=ytUfyL_lwvnJNDjQKgzusR1wLAI
10. The Risk Management Process: Business Strategy and Tactics By Christopher L.Culp - Business & Economics - 2001 - 624 pages
Written by an experienced consultant with impeccable academic credentials and incisive analytical thinking, this book is a must-read for the senior managers.
http://books.google.co.in/books?id=mMexkvsl2WMC&printsec=frontcover&dq=risk+management&lr=&sig=6paf2rvE2XQyXhnhaYiBC-rgK9M
http://books.google.co.in/books?id=aQcV6Tr11w8C&printsec=frontcover&dq=risk+management&sig=cjOmUuGQxIRGd2zIsJmx5r6huYg
2. Value at Risk: The New Benchmark for Managing Financial Risk By Philippe Jorion, 2001
http://books.google.co.in/books?id=S2SsFblvUdMC&printsec=frontcover&dq=risk+management&sig=dp5VhnaWT3fANxk5PTjgZiJEUmk
3. The Fundamentals of Risk Measurement By Christopher Ian Marrison,
http://books.google.co.in/books?id=ndXkO0E3Of4C&printsec=frontcover&dq=risk+management&sig=sxk5x3-TEgcdS2niJiV12vvkoI0
4. Risk Management and Value Creation in Financial Institutions By Gerhard Schroeck, 2002
http://books.google.co.in/books?id=kjQ-rnunA98C&printsec=frontcover&dq=risk+management&lr=&sig=6TSlPn82GXTgLkAuh3IZYUdDe6g
5. Managing Operational Risk: 20 Firmwide Best Practice Strategies By Douglas G Hoffman, 2002
http://books.google.co.in/books?id=qBCegetwV0cC&printsec=frontcover&dq=risk+management&lr=&sig=2yi2e4EowxAECmk9gsE1xaE0NNc
6. Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency ...
by Richard Horwitz - 2004 - 275 pages
Hedge Fund Risk Fundamentals is the first book to bring these issues to the forefront.
http://books.google.co.in/books?id=lOYycMDPJKkC&printsec=frontcover&dq=risk+management&lr=&sig=6nboT-x7fkiVYIPs2g71kxoGuAY
7. Risk Management: Approaches for Fixed Income Markets By Bennett W. Golub, Leo M. Tilman, 2000
http://books.google.co.in/books?id=PIAI_dUHO-oC&pg=PP1&dq=risk+management&lr=&sig=SSOnwBwDre6zFMn-HXEjMeM-24M
8. Elements of Financial Risk Management By Peter F. Christoffersen
2003 - 214 pages
This book will appeal to practitioners in the financial services and investment industries, as well as graduate students and advanced undergraduates.
http://books.google.co.in/books?id=F5jtlULHNrwC&printsec=frontcover&dq=risk+management&lr=&sig=l0zJa_T7M6GjjIrhzz-f09GfYxM
9. Advances in Fixed Income Valuation Modeling and Risk Management By Frank J.Fabozzi - Business & Economics - 1997 - 391 pages
Advances in Fixed Income Valuation Modeling and Risk Management provides in-depth examinations by thirty-one expert research and opinion leaders.
http://books.google.co.in/books?id=UkzfNsO8l4gC&printsec=frontcover&dq=risk+management&lr=&sig=ytUfyL_lwvnJNDjQKgzusR1wLAI
10. The Risk Management Process: Business Strategy and Tactics By Christopher L.Culp - Business & Economics - 2001 - 624 pages
Written by an experienced consultant with impeccable academic credentials and incisive analytical thinking, this book is a must-read for the senior managers.
http://books.google.co.in/books?id=mMexkvsl2WMC&printsec=frontcover&dq=risk+management&lr=&sig=6paf2rvE2XQyXhnhaYiBC-rgK9M
Wednesday, January 23, 2008
Risk management - Reuters Help
Trade & Risk Management
Reuters provides the enterprise with a range of products to help manage order flow, make trade decisions and control risk. We have built on our strength in the front office to address risk and trade management through the back office.
This includes advanced middle-office functionality for market and credit risk and comprehensive features for settlement, clearing, the generation of accounting entries and cash management.
Risk management is becoming an increasingly important issue for investment banks and other financial institutions in the face of mounting regulation and the introduction of new capital adequacy standards, such as the Basel II..
Investment banks need to identify and disclose their major sources of risk and the market factors behind them. They need timely and consistent credit and limit information. Investment banks also need real-time systems that ensure their requirements for global control and monitoring are fully met.
The investment bank middle office monitors and manages the bank's risk exposures. In order to manage global market and credit risk, the middle office liaises closely with the front office responsible for trading operations and also with the back office which handles the administration associated with the settlement of trades.
Increases in cross-border trading, credit defaults, bankruptcies and globalisation have made credit management a much more demanding and complex task for the investment bank middle office. Maintaining and monitoring essential credit and market data risk in one place is a major challenge facing the investment bank middle office. The most important element for an investment bank middle office is data collection and consolidation from both the trading and banking books.
In order to produce enterprise-wide risk information on all an investment bank's activities, the middle office needs a system that delivers analysis for both market and credit risk while integrating seamlessly with the front office's position keeping.
Value at Risk, a category of risk measures, is widely used by the middle offices of investment banks and other financial firms to assess the risk of a trading portfolio. Any system designed to enable an investment bank middle office to calculate Value at Risk must provide multiple risk methodologies with comprehensive pricing functions and analytical tools. The middle office also needs to be able to back-test its risk models to comply with regulations.
Reuters has more than 20 years' experience in helping its customers successfully monitor and control risk. Reuters risk and trade management solutions are designed to provide the best fit with customers' business requirements. They enable investment banks and other financial institutions to address global risk and trade management across the whole enterprise from the trading floor through to the middle and back office.
Input to the business process
Pools of liquidity including:
Exchanges
Brokers
Banks
Corporations
Branches
Front office
Pre-trade analytics
Limit checking
Deal Capture
Real-time position keeping
Pricing analytics
Tactical risk management
Profit and Loss
Solutions
Trade management
Reuters Kondor+
Reuters JRisk
Limit management
Reuters Kondor Global Risk
Middle office
Limits Management
Market risk management
Credit risk management
Back testing
Enterprise-wide risk management
Regulatory reporting
Double validation
Market conformity check
Solutions
Limit management
Reuters Kondor Global Risk
Credit & market risk management
Reuters Kondor Value at Risk
http://about.reuters.com/productinfo/s/investment_bank_middle_office/
Reuters provides the enterprise with a range of products to help manage order flow, make trade decisions and control risk. We have built on our strength in the front office to address risk and trade management through the back office.
This includes advanced middle-office functionality for market and credit risk and comprehensive features for settlement, clearing, the generation of accounting entries and cash management.
Risk management is becoming an increasingly important issue for investment banks and other financial institutions in the face of mounting regulation and the introduction of new capital adequacy standards, such as the Basel II..
Investment banks need to identify and disclose their major sources of risk and the market factors behind them. They need timely and consistent credit and limit information. Investment banks also need real-time systems that ensure their requirements for global control and monitoring are fully met.
The investment bank middle office monitors and manages the bank's risk exposures. In order to manage global market and credit risk, the middle office liaises closely with the front office responsible for trading operations and also with the back office which handles the administration associated with the settlement of trades.
Increases in cross-border trading, credit defaults, bankruptcies and globalisation have made credit management a much more demanding and complex task for the investment bank middle office. Maintaining and monitoring essential credit and market data risk in one place is a major challenge facing the investment bank middle office. The most important element for an investment bank middle office is data collection and consolidation from both the trading and banking books.
In order to produce enterprise-wide risk information on all an investment bank's activities, the middle office needs a system that delivers analysis for both market and credit risk while integrating seamlessly with the front office's position keeping.
Value at Risk, a category of risk measures, is widely used by the middle offices of investment banks and other financial firms to assess the risk of a trading portfolio. Any system designed to enable an investment bank middle office to calculate Value at Risk must provide multiple risk methodologies with comprehensive pricing functions and analytical tools. The middle office also needs to be able to back-test its risk models to comply with regulations.
Reuters has more than 20 years' experience in helping its customers successfully monitor and control risk. Reuters risk and trade management solutions are designed to provide the best fit with customers' business requirements. They enable investment banks and other financial institutions to address global risk and trade management across the whole enterprise from the trading floor through to the middle and back office.
Input to the business process
Pools of liquidity including:
Exchanges
Brokers
Banks
Corporations
Branches
Front office
Pre-trade analytics
Limit checking
Deal Capture
Real-time position keeping
Pricing analytics
Tactical risk management
Profit and Loss
Solutions
Trade management
Reuters Kondor+
Reuters JRisk
Limit management
Reuters Kondor Global Risk
Middle office
Limits Management
Market risk management
Credit risk management
Back testing
Enterprise-wide risk management
Regulatory reporting
Double validation
Market conformity check
Solutions
Limit management
Reuters Kondor Global Risk
Credit & market risk management
Reuters Kondor Value at Risk
http://about.reuters.com/productinfo/s/investment_bank_middle_office/
Risk Management Consultant
GlobeRisk Areas of Experience in Asset Management Organizations
Investment Risk
development of risk policy for Scandinavian investment fund;
methodologies review for two global quantitative (automated trading) funds;
review of quantitative derivatives fund for US investment bank;
advised several OECD government entities on structure of liability management. Areas included organisational development, objectives, liability management methods to achieve objectives and performance assessment tools/reporting
advised large European State Pension fund on setting up framework, measures and systems for credit risk management to support move into corporate bonds;
Contact
GlobeRisk Ltd
GlobeRisk is based in Leatherhead, Surrey in the United Kingdom. Our location by Junction 9 of the M25 London Orbital Motorway offers excellent travel links to London, most parts of the UK and most parts of the world.
General Enquiries:
email : enquiries@globerisk.org,
Phone: +44 (0)1372 817498
Fax: +44 (0)1372 817498
Andrew Smith, Managing Director
email : andrewsmith@globerisk.org,
Phone: +44 (0)7979 703137
http://www.globerisk.org/index.php?action=ContactUs
Investment Risk
development of risk policy for Scandinavian investment fund;
methodologies review for two global quantitative (automated trading) funds;
review of quantitative derivatives fund for US investment bank;
advised several OECD government entities on structure of liability management. Areas included organisational development, objectives, liability management methods to achieve objectives and performance assessment tools/reporting
advised large European State Pension fund on setting up framework, measures and systems for credit risk management to support move into corporate bonds;
Contact
GlobeRisk Ltd
GlobeRisk is based in Leatherhead, Surrey in the United Kingdom. Our location by Junction 9 of the M25 London Orbital Motorway offers excellent travel links to London, most parts of the UK and most parts of the world.
General Enquiries:
email : enquiries@globerisk.org,
Phone: +44 (0)1372 817498
Fax: +44 (0)1372 817498
Andrew Smith, Managing Director
email : andrewsmith@globerisk.org,
Phone: +44 (0)7979 703137
http://www.globerisk.org/index.php?action=ContactUs
Risk Management Consultant
GlobeRisk Areas of Experience in Investment Banks
Market Risk, ALM, Funding and Liquidity
assisted bank to manage down and subsequently sell a large Interest rate options book.
comprehensive review of financial, market risk and credit risk management models, techniques and policies at one of the world's top three global derivative organisations;
review and development of income recognition adjustments (PLA) for off balance sheet products at several major investment banking institutions;
design and development of credit derivatives models (based on Actuarial techniques) for new credit trading business;
valuation testing and specialist financial modelling advice to a range of top derivatives businesses
assisted several Treasury/Capital Markets operations to reengineer financial control activities;
Review and development of the use of Repo funding at Capital Markets trading house;
Design and Implementation of a new trading limts framework at a leading Nordic Investment Bank
article: "Myths and Legends of Value at Risk" (Futures & Options World Issue 324, May 1998)
Credit Technical Risk and Underwriting
development of netting and collateral management framework for major global capital markets bank;
development of credit exposure measurement and portfolio management methods for off balance sheet instruments at capital markets bank;
review and test of credit risk model for AAA Special Purpose Vehicle. This was used by the client to support negotiations with rating agencies;
Operational Risk
development of KPMG best practice controls requirements for trading businesses;
minimum controls portfolio for International investment bank;
Firmwide Risk Management
Review of firmwide approach to management of all risks across a leading financial trading organisation
Review of firmwide approach to management of all risks across a leading investment bank
development of Risk Adjusted performance models/framework at multinational development bank.
Regulatory, Compliance and Financial Controls
design of mark to market control environments for the derivatives books of several investment banks
article: "Off balance sheet valuation Adjustments" (Journal of Derivatives Trading & Regulation 1997, Netexposure 1998);
Strategy
development of medium term and marketing strategy for derivatives trading and arbitrage organisation;
strategy development for Capital Markets business of major Nordic retail/commercial bank;
IT
selection of market risk management system for UK capital markets/derivatives bank;
review and modification of the requirements for front, middle and back office systems at several clients;
GlobeRisk Ltd
GlobeRisk is based in Leatherhead, Surrey in the United Kingdom. Our location by Junction 9 of the M25 London Orbital Motorway offers excellent travel links to London, most parts of the UK and most parts of the world.
General Enquiries:
email : enquiries@globerisk.org,
Phone: +44 (0)1372 817498
Fax: +44 (0)1372 817498
Andrew Smith, Managing Director
email : andrewsmith@globerisk.org,
Phone: +44 (0)7979 703137
http://www.globerisk.org/index.php?action=ContactUs
Market Risk, ALM, Funding and Liquidity
assisted bank to manage down and subsequently sell a large Interest rate options book.
comprehensive review of financial, market risk and credit risk management models, techniques and policies at one of the world's top three global derivative organisations;
review and development of income recognition adjustments (PLA) for off balance sheet products at several major investment banking institutions;
design and development of credit derivatives models (based on Actuarial techniques) for new credit trading business;
valuation testing and specialist financial modelling advice to a range of top derivatives businesses
assisted several Treasury/Capital Markets operations to reengineer financial control activities;
Review and development of the use of Repo funding at Capital Markets trading house;
Design and Implementation of a new trading limts framework at a leading Nordic Investment Bank
article: "Myths and Legends of Value at Risk" (Futures & Options World Issue 324, May 1998)
Credit Technical Risk and Underwriting
development of netting and collateral management framework for major global capital markets bank;
development of credit exposure measurement and portfolio management methods for off balance sheet instruments at capital markets bank;
review and test of credit risk model for AAA Special Purpose Vehicle. This was used by the client to support negotiations with rating agencies;
Operational Risk
development of KPMG best practice controls requirements for trading businesses;
minimum controls portfolio for International investment bank;
Firmwide Risk Management
Review of firmwide approach to management of all risks across a leading financial trading organisation
Review of firmwide approach to management of all risks across a leading investment bank
development of Risk Adjusted performance models/framework at multinational development bank.
Regulatory, Compliance and Financial Controls
design of mark to market control environments for the derivatives books of several investment banks
article: "Off balance sheet valuation Adjustments" (Journal of Derivatives Trading & Regulation 1997, Netexposure 1998);
Strategy
development of medium term and marketing strategy for derivatives trading and arbitrage organisation;
strategy development for Capital Markets business of major Nordic retail/commercial bank;
IT
selection of market risk management system for UK capital markets/derivatives bank;
review and modification of the requirements for front, middle and back office systems at several clients;
GlobeRisk Ltd
GlobeRisk is based in Leatherhead, Surrey in the United Kingdom. Our location by Junction 9 of the M25 London Orbital Motorway offers excellent travel links to London, most parts of the UK and most parts of the world.
General Enquiries:
email : enquiries@globerisk.org,
Phone: +44 (0)1372 817498
Fax: +44 (0)1372 817498
Andrew Smith, Managing Director
email : andrewsmith@globerisk.org,
Phone: +44 (0)7979 703137
http://www.globerisk.org/index.php?action=ContactUs
Saturday, November 17, 2007
Risk Management - Investment Banks - Goldman Sachs
Goldman CEO Touts Firm's Risk-Management Prowess
9 November 2007
DOW JONES NEWSWIRES
Goldman Sachs Group Inc. (GS) Chief Executive Lloyd Blankfein said that the secret to Goldman's success is its ability to gauge the assets it is holding on its balance sheet.
Blankfein, speaking Friday at a New York conference organized by University of Pennsylvania's Wharton business school, said Goldman places special emphasis on mark-to-market pricing of securities and other assets.
"If you rigorously mark to market every day, it's not impossible to have a very big problem, but it's less likely. it's the single most important thing at our firm." he said.
Blankfein told the audience of MBA students and others that after the recent "sunny" period for financial firms, the market turbulence that started this summer means nobody is necessarily safe from sudden losses. He said he often cautions Goldman employees against hubris.
Blankfein noted that the recent credit crunch stemmed in part from risk being priced at extraordinarily cheap levels. Today, he said in a brief interview after his speech, risk pricing has moved "in the right direction," but he said he is "not sure" if pricing needs to rise further.
http://www.smartmoney.com/news/ON/index.cfm?story=ON-20071109-000815-1658
-----------
March 15: Operational Risk - Goldman Sachs Settles with SEC and NYSE for Role in Illegal Trading Scheme
Date: Thursday, March 15, 2007
The SEC and the NYSE Regulation, Inc. yesterday settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for its violations arising from in an illegal trading scheme carried out by customers through their accounts at the firm. Both proceedings find that firm customers traded and profited by illegally selling securities short just prior to public offerings of the companies’ securities.
http://www.google.co.in/search?q=risk+management+goldman+sachs&hl=en&safe=off&start=20&sa=N
Need to find more details about it
-----------------
Goldman Leads The Risk Parade
11.15.06,
Goldman Sachs with its massive trading operations and exposure to most of the riskiest sectors in the business, is an example of how risk management has evolved.
Interest rate risk in the third quarter was up to $55 million, higher than the $49 million in the second quarter and the $38 million reported in the third quarter last year. Goldman's total value at risk--the potential one-day loss in its trading positions due to adverse market conditions--was $92 million, up from $76 million in the same period last year.
Goldman's notional exposure to derivatives alone is more than $1 trillion, though only $58 billion netting out all of its positions. JPMorgan Chase (nyse: JPM - news - people ), a far bigger player in the interest-rate derivatives market, with $47 trillion in notional exposure in the third quarter, nets out to $26 billion in exposure, by comparison.
Goldman's ability to spin gold out of virtually any market scenario on a consistent basis is the envy of many on Wall Street, but it is not by accident. Sophisticated technology systems developed over the last decade allow it to inch out on the limb without risking too much. And its tentacles in most corners of the market give it access to information that beat most of its rivals.
In the last decade, Goldman, like other Wall Street banks, has built up its trading and private equity groups alongside its more traditional asset management and merger and acquisitions advisory units. Proprietary trading has become a dominant feature of its business, and the least understood from the outside, since Goldman won't talk about its positions.
Goldman even manages to deftly juggle reputation risk in the course of its business. It advised NYSE Group and its merger partner, Archipelago Holdings, last year, despite its financial stake in Archipelago and its seat holdings on the exchange. It has managed to bid alongside potential clients for big private equity deals.
But perhaps the biggest boost has come from the industry's commoditization of risk into parcels that can be sold to investors no matter what their appetite for uncertainty.
This derivatives market has exploded in recent years. Fewer than 700,000 short-term interest-rate futures contracts traded on the Chicago Mercantile Exchange just six years ago. Now, the daily volume is 3.1 million contracts, or a notional value of $3.1 trillion.
The boom over the last six years coincides with the introduction of electronic trading side-by-side with floor traders at the Chicago Mercantile Exchange (nyse: CME - news - people ) and the Board of Trade.
But it also comes from increased investor appetite for hedging and speculating on the movements of everything from rates on U.S. Treasuries to foreign currencies and energy prices.
Seven years ago, after the near collapse of Long-Term Capital Management, 12 Wall Street firms got together with Gerald Corrigan, a former Federal Reserve Bank president and now a managing director at Goldman, to look at ways to mitigate counterparty risk in the markets.
Fourteen banks coughed up $300 million each to bail out LTCM in late 1998 and arrange for its orderly liquidation. After the smoke had cleared, it emerged that LTCM had been allowed to leverage its capital 25-to-1. One of the results of the industry group that was formed after that, the Counterparty Risk Management Group, was improved exchange of information about counterparty risks.
One of the recommendations of the group last year was to extend this reporting of large exposures to hedge funds.
http://www.forbes.com/logistics/2006/11/15/risk-wall-street-goldman-biz-logistics-cx_lm_1115goldman.html
-----------------------
9 November 2007
DOW JONES NEWSWIRES
Goldman Sachs Group Inc. (GS) Chief Executive Lloyd Blankfein said that the secret to Goldman's success is its ability to gauge the assets it is holding on its balance sheet.
Blankfein, speaking Friday at a New York conference organized by University of Pennsylvania's Wharton business school, said Goldman places special emphasis on mark-to-market pricing of securities and other assets.
"If you rigorously mark to market every day, it's not impossible to have a very big problem, but it's less likely. it's the single most important thing at our firm." he said.
Blankfein told the audience of MBA students and others that after the recent "sunny" period for financial firms, the market turbulence that started this summer means nobody is necessarily safe from sudden losses. He said he often cautions Goldman employees against hubris.
Blankfein noted that the recent credit crunch stemmed in part from risk being priced at extraordinarily cheap levels. Today, he said in a brief interview after his speech, risk pricing has moved "in the right direction," but he said he is "not sure" if pricing needs to rise further.
http://www.smartmoney.com/news/ON/index.cfm?story=ON-20071109-000815-1658
-----------
March 15: Operational Risk - Goldman Sachs Settles with SEC and NYSE for Role in Illegal Trading Scheme
Date: Thursday, March 15, 2007
The SEC and the NYSE Regulation, Inc. yesterday settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for its violations arising from in an illegal trading scheme carried out by customers through their accounts at the firm. Both proceedings find that firm customers traded and profited by illegally selling securities short just prior to public offerings of the companies’ securities.
http://www.google.co.in/search?q=risk+management+goldman+sachs&hl=en&safe=off&start=20&sa=N
Need to find more details about it
-----------------
Goldman Leads The Risk Parade
11.15.06,
Goldman Sachs with its massive trading operations and exposure to most of the riskiest sectors in the business, is an example of how risk management has evolved.
Interest rate risk in the third quarter was up to $55 million, higher than the $49 million in the second quarter and the $38 million reported in the third quarter last year. Goldman's total value at risk--the potential one-day loss in its trading positions due to adverse market conditions--was $92 million, up from $76 million in the same period last year.
Goldman's notional exposure to derivatives alone is more than $1 trillion, though only $58 billion netting out all of its positions. JPMorgan Chase (nyse: JPM - news - people ), a far bigger player in the interest-rate derivatives market, with $47 trillion in notional exposure in the third quarter, nets out to $26 billion in exposure, by comparison.
Goldman's ability to spin gold out of virtually any market scenario on a consistent basis is the envy of many on Wall Street, but it is not by accident. Sophisticated technology systems developed over the last decade allow it to inch out on the limb without risking too much. And its tentacles in most corners of the market give it access to information that beat most of its rivals.
In the last decade, Goldman, like other Wall Street banks, has built up its trading and private equity groups alongside its more traditional asset management and merger and acquisitions advisory units. Proprietary trading has become a dominant feature of its business, and the least understood from the outside, since Goldman won't talk about its positions.
Goldman even manages to deftly juggle reputation risk in the course of its business. It advised NYSE Group and its merger partner, Archipelago Holdings, last year, despite its financial stake in Archipelago and its seat holdings on the exchange. It has managed to bid alongside potential clients for big private equity deals.
But perhaps the biggest boost has come from the industry's commoditization of risk into parcels that can be sold to investors no matter what their appetite for uncertainty.
This derivatives market has exploded in recent years. Fewer than 700,000 short-term interest-rate futures contracts traded on the Chicago Mercantile Exchange just six years ago. Now, the daily volume is 3.1 million contracts, or a notional value of $3.1 trillion.
The boom over the last six years coincides with the introduction of electronic trading side-by-side with floor traders at the Chicago Mercantile Exchange (nyse: CME - news - people ) and the Board of Trade.
But it also comes from increased investor appetite for hedging and speculating on the movements of everything from rates on U.S. Treasuries to foreign currencies and energy prices.
Seven years ago, after the near collapse of Long-Term Capital Management, 12 Wall Street firms got together with Gerald Corrigan, a former Federal Reserve Bank president and now a managing director at Goldman, to look at ways to mitigate counterparty risk in the markets.
Fourteen banks coughed up $300 million each to bail out LTCM in late 1998 and arrange for its orderly liquidation. After the smoke had cleared, it emerged that LTCM had been allowed to leverage its capital 25-to-1. One of the results of the industry group that was formed after that, the Counterparty Risk Management Group, was improved exchange of information about counterparty risks.
One of the recommendations of the group last year was to extend this reporting of large exposures to hedge funds.
http://www.forbes.com/logistics/2006/11/15/risk-wall-street-goldman-biz-logistics-cx_lm_1115goldman.html
-----------------------
Risk Management - Mutual Funds - Investment Banks
download a white paper on operational risk for the buy side 2001
http://www.iafe.org/upload/OperationalRiskfortheBuySide-WhitePaper.pdf
http://www.iafe.org/upload/OperationalRiskfortheBuySide-WhitePaper.pdf
Process Risk Management Merrill Lynch
Download a presentation from
bosfed.org/bankinfo/conevent/oprisk/lively.pdf
Merrill Lynch & Co. Process Risk Management Merrill Lynch is focused upon ... linkages and risk of process failure. and evaluate the effectiveness of ...
download more presentations from Goldman Sachs etc. from
http://bosfed.org/bankinfo/conevent/oprisk2005/index.htm
From Annual Report of 2000 of Merrill Lynch
http://www.ml.com/annualmeetingmaterials/annrep00/ar/risk-management.html
---------------------
At the SIA’s 2nd Annual Risk Management Conference for financial services firms held on June 27th in New York City, overall, the maturity of enterprise risk management in the past year has definitely moved up one notch. Uncertainty about how to define enterprise risk management and the debate about the value of risk management have been replaced with more practical concerns on how to best implement a risk management program and how to measure the performance.
According to Julian Fry, Global Head of Operational Risk at Merrill Lynch & Co., Inc., who was a panelist at the conference, the top 10 risk management business issues within Financial Services and Investment Management companies are:
1) Proper business practices, 2) Internal fraud, 3) Knowing your client, 4) Transaction execution, 5) Client selection exposure, 6) Business disruption, 7) Product complexity/pricing, 8) Employment practices, 9) Accounting evaluation (sox), and 10) Back office operations.
You can download report on the conference from
http://www.logicmanager.com/contents/forms/register_ebizq.php
after registering on the site.
---------------------
Risk Management
Risk Management Philosophy
Risk-taking is an integral part of Merrill Lynch's core business activities. In the course of conducting its business operations, Merrill Lynch is exposed to a variety of risks. These risks include market, credit, liquidity, process, and other risks that are material and require comprehensive controls and management. The responsibility and accountability for these risks remain primarily with the businesses.
The Corporate Risk Management ("CRM") group ensures that these risks are properly identified, monitored, and managed throughout the firm. To accomplish this, CRM has established a risk management process, which includes:
A formal risk governance organization that defines the oversight process and its components.
A regular review of the entire risk management process by the Audit Committee of the Board of Directors.
Clearly defined risk management policies and procedures supported by the most appropriate and advanced analytic tools available.
Communication and coordination between the business, executive, and risk functions while maintaining strict segregation of responsibilities, controls, and oversight.
Clearly articulated risk tolerance levels as defined by the Executive Management Committee ("EMC") that are regularly reviewed to ensure that Merrill Lynch's risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
The risk management process, combined with CRM's personnel and analytic infrastructure, works to ensure that Merrill Lynch's risk tolerance is well-defined and understood by the firm's risk-takers as well as by its executive management. Other groups, including Audit, Finance, and Treasury, work with CRM to establish this overall risk management control process. While no risk management system can ever be absolutely complete, the goal of CRM is to make certain that risk-related losses occur within acceptable, predefined levels.
Risk Governance Structure
Merrill Lynch's risk governance structure is comprised of the Audit Committee, the EMC, the Risk Oversight Committee ("ROC"), the Risk Policy Group ("RPG"), the business units, CRM, and various corporate governance committees. The roles of these respective groups are as follows:
The Audit Committee is comprised entirely of external directors and has authorized the ROC to establish Merrill Lynch's risk management policies.
The EMC establishes risk tolerance levels for the firm and authorizes material changes in Merrill Lynch's risk profile. It also ensures that the risks assumed by Merrill Lynch are managed within these tolerance levels and verifies that Merrill Lynch has implemented appropriate policies for the effective management of risks. The EMC must approve all substantive changes to risk policies, including those proposed by the ROC. The EMC pays particular attention to risk concentrations and liquidity concerns.
The ROC, comprised of senior business and control managers and chaired by the Head of CRM, oversees Merrill Lynch's risks and ensures that the business units create and implement processes to identify, measure, and monitor their risks. The ROC also assists the EMC in determining risk tolerance levels for the firm's business units and monitors the activities of Merrill Lynch's corporate governance committees, reporting significant issues and transactions to the EMC and the Audit Committee.
The RPG is a working group of the ROC comprised of control managers and is chaired by the Head of CRM. The RPG reviews various risk-related issues and reports to the ROC.
Various other governance committees exist to create policy, review activity, and ensure that new and existing business initiatives remain within established risk tolerance levels. These committees include the New Product Review Committee, Debt and Equity Capital Commitment Committees, Real Estate Capital Commitment Committee, Credit Policy Committee, Reserve Committee, Special Transactions Review Committee, and the Structured Products Committee. Representatives of the principal independent control functions participate as voting members of these committees.
Risk Framework
CRM's chief monitoring and risk measurement tool is Merrill Lynch's Risk Framework ("Framework"). The Framework defines and communicates Merrill Lynch's risk tolerance and raises exceptions for certain areas of risk concentration. Exceptions and violations are reported and investigated at predefined and appropriate levels of management. The Framework and its limits have been approved by the EMC and the risk parameters that define the Framework have been reviewed by the Audit Committee. The EMC reviews the Framework annually and approves any material changes. The ROC reports all substantive Framework changes to the Audit Committee.
The Framework establishes aggregate and broad risk limits for Merrill Lynch. Market risk limits are intended to constrain exposure to specific classes and factors of market risk and Value-at-Risk ("VaR"). VaR is a statistical measure of the potential loss in the fair value of a portfolio due to adverse movements in underlying risk factors. Credit risk limits are intended to constrain the magnitude and tenor of exposure to individual counterparties, types of counterparties, countries, and financing collateral. The Framework has been established for CICG, PCG, MLIM, and Treasury. Each business is responsible for ensuring that its risk activities adhere to the limits established under the Framework. Individual Frameworks are continually refined to increase the granularity and scope of risk coverage.
Corporate Risk Management
CRM is an independent control function responsible for Merrill Lynch's risk management process. The head of CRM reports directly to the Chief Financial Officer, chairs the ROC and RPG, and is a member of the EMC. CRM manages Merrill Lynch's market and credit risks. Market risk is defined to be the potential change in value of trading instruments caused by fluctuations in interest rates, exchange rates, equity and commodity prices, credit spreads, and/or other risks. Credit risks are defined to be the potential for loss that can occur as a result of impairment in the creditworthiness of an issuer or counterparty or a default by an issuer or counterparty on its contractual obligations. CRM also provides Merrill Lynch with an overview of its risk for various aggregate portfolios and develops the systems and analytics to conduct all risk management functions. CRM is organized into the following four groups:
The CICG Market Risk Group is responsible for defining the products and markets in which CICG will transact and take risk. Moreover, it is responsible for identifying the risks to which CICG businesses will be exposed in these approved products and markets. The CICG Market Risk group also establishes the Framework market risk limits against which risk concentrations are monitored and controlled. Within the Group is a dedicated, separate quantitative unit that evaluates the efficacy of trading and risk models through stressing and testing the mathematical models used by various control and business units.
The Credit Risk Group assesses the creditworthiness of existing and potential individual clients, institutional counterparties and issuers, and determines firmwide credit risk appetite within Framework limits. The Group reviews and monitors specific transactions as well as portfolio and other credit risk concentrations. It is also responsible for ongoing credit quality and limit compliance, and the Group works with the business units of Merrill Lynch to manage and mitigate credit risk. A specialist unit that focuses on early problem asset identification and management is also part of the Credit Risk Group.
The Portfolio Risk Group has a variety of firmwide responsibilities including integrating market, credit and business risks through firmwide stress and event analysis, enhancing the internal attribution of economic capital to business units, and conducting country risk and rating assessments. The Group also has a Process Risk team that specifically focuses on the implementation of the firmwide process risk management program. In addition, the Portfolio Risk Group oversees the proprietary market risk taken within the Merrill Lynch Treasury function, PCG and MLIM.
The Risk Infrastructure Group provides CRM with the analytic, technological, and policy support necessary to quantify and monitor firmwide market, credit and portfolio risk.
Efficacy
CRM continuously reviews and refines its risk processes and methodologies. The overall effectiveness and responsiveness of CRM can be seen on a broader level when analyzing weekly net trading revenues over time. CRM policies and procedures for monitoring and controlling risk combined with the businesses' focus on customer order-flow driven revenues have helped Merrill Lynch to reduce earnings volatility within its portfolios. While no guarantee can be given regarding future earnings volatility, CRM continues to work on policies and procedures that assist the firm in measuring and monitoring its risks.
Market Risk
Merrill Lynch uses a variety of quantitative metrics to assess the risk of its positions and portfolios. In particular, CRM quantifies the sensitivities of Merrill Lynch's present portfolios to changes in market variables. These sensitivities are then utilized in the context of historical data to estimate earnings and loss distributions that Merrill Lynch's present portfolios would have incurred throughout the historical period. From these distributions, CRM derives a number of useful risk statistics including VaR. VaR is an estimate of the amount that Merrill Lynch's present portfolios could lose with a specified degree of confidence, over a given time interval. The VaR statistic for a particular risk category represents the amount that Merrill Lynch's present portfolios could lose due to past market movements in that specific risk category.
The VaR for Merrill Lynch's overall portfolios is less than the sum of the VaRs for individual risk categories because movements in different risk categories occur at different times and, historically, extreme movements have not occurred in all risk categories simultaneously. The difference between the sum of the VaRs for individual risk categories and the VaR calculated for all risk categories is shown in the following tables and may be viewed as a measure of the diversification within Merrill Lynch's portfolios. CRM believes that the tabulated risk measures provide some guidance as to the amount Merrill Lynch could lose in future periods and it works continuously to improve its measurement and the methodology of its VaR. However, like all statistical measures, especially those that rely heavily on historical data, VaR needs to be interpreted with a clear understanding of its assumptions and limitations.
In the Merrill Lynch VaR system, CRM uses a historical simulation approach to estimate value-at-risk using a 99% confidence level and a two-week holding period for trading and non-trading instruments. Sensitivities to market risk factors are aggregated and combined with a database of historical biweekly changes in market factors to simulate a series of profits and losses. The level of loss that is exceeded in that series 1% of the time is used as the estimate for the 99% confidence level VaR. The overall total VaR amounts are presented across major risk categories, including exposure to volatility risk found in certain products, e.g., options.
Credit Risk
Merrill Lynch's Credit Risk Group uses a variety of methodologies to set limits on exposure resulting from a counterparty or issuer failing to perform on its contractual obligations. The Group performs analysis in the context of industrial, regional and global economic trends and incorporates portfolio and concentration effects when determining risk appetite. Credit risk limits take into account measures of both current and potential exposure and are set and monitored by broad risk type, sub-product type and tenor to maturity. Credit risk mitigation techniques include, where appropriate, the right to require initial collateral or margin, the right to terminate transactions or obtain collateral should unfavorable events occur, the right to call for collateral when certain exposure thresholds are exceeded, and the purchase of credit default insurance. With senior management involvement, Merrill Lynch conducts regular portfolio reviews, monitors counterparty creditworthiness, and evaluates transaction risk with a view toward early problem identification and protection against unacceptable credit-related losses.
In 2000, the Credit Risk Group introduced enhanced methods to assist in the management of Merrill Lynch's credit risk. The Credit Framework now includes increased product and tenor granularity, and the Group has made enhancements to Merrill Lynch's internal credit rating and counterparty review process.
Credit risk and exposure that originates from Merrill Lynch's retail customer business is monitored constantly by CRM. Exposures include credit risks for mortgages, home equity lines of credit, margin accounts and working capital lines that Merrill Lynch maintains with certain small business clients. These exposures are collateralized in accordance with regulatory requirements governing such activities.
Merrill Lynch enters into International Swaps and Derivatives Association, Inc. master agreements or their equivalent ("master netting agreements") with each of its derivative counterparties as soon as possible. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable receivables and payables with the same counterparty to be offset on the Consolidated Balance Sheets, providing for a more meaningful balance sheet presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral, principally U.S. Government and agencies securities, on certain derivative transactions. From an economic standpoint, Merrill Lynch evaluates default risk exposures net of related collateral.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate its default risk on derivatives whenever possible by entering into transactions with provisions that enable Merrill Lynch to terminate or reset the terms of its derivative contracts.
Process Risk
Process Risk Management is an evolving risk management discipline. Merrill Lynch defines process risk as the risk of loss resulting from inadequate controls or business disruption relating to people, internal processes, systems, or external events. Examples of process risks faced by the firm include systems failure, human error, fraud, major fire, or other disasters.
Merrill Lynch manages process risks in many ways including maintaining strong corporate principles of value, appropriately training employees, maintaining a comprehensive system of internal controls, using technology to automate processes and reduce manual errors, monitoring risk events, employing experienced personnel, maintaining certain backup facilities, conducting internal audits, and emphasizing the importance of management oversight. In addition, Merrill Lynch has established a process risk management group within CRM to focus on further enhancing the management of these risks.
This Group manages a firmwide process risk management framework and has developed policies and procedures aimed at establishing a consistent approach to identify, monitor, and manage process risks across all business lines. Within this framework, the Group has created business line steering committees to coordinate process risk management efforts. The Group uses a variety of risk management tools and techniques to reinforce the firm's strong risk management culture. These include summarizing and monitoring process-risk-related losses on a regular basis, developing risk indicators to facilitate proactive risk management capabilities, and self-assessments to identify risks, corresponding controls, and measure improvement.
Other Risks
Liquidity risks arise in the course of Merrill Lynch's general funding activities and in the management of its balance sheet. This risk includes both being unable to raise funding with appropriate maturity and interest rate characteristics and the risk of being unable to liquidate an asset in a timely manner at a reasonable price. For further information on how Merrill Lynch manages liquidity risk, see the Capital Adequacy and Liquidity section.
Merrill Lynch encounters a variety of other risks, which have the ability to impact the viability, profitability, and cost effectiveness of present or future transactions. Such risks include political, tax, and regulatory risks that may arise due to changes in local laws, tax statutes, or regulations. To assist in the mitigation of such risks, Merrill Lynch rigorously reviews new and pending legislation and regulations. Additionally, Merrill Lynch employs professionals in jurisdictions in which the company operates to actively follow issues of potential concern or impact to the firm and to participate in related interest groups.
bosfed.org/bankinfo/conevent/oprisk/lively.pdf
Merrill Lynch & Co. Process Risk Management Merrill Lynch is focused upon ... linkages and risk of process failure. and evaluate the effectiveness of ...
download more presentations from Goldman Sachs etc. from
http://bosfed.org/bankinfo/conevent/oprisk2005/index.htm
From Annual Report of 2000 of Merrill Lynch
http://www.ml.com/annualmeetingmaterials/annrep00/ar/risk-management.html
---------------------
At the SIA’s 2nd Annual Risk Management Conference for financial services firms held on June 27th in New York City, overall, the maturity of enterprise risk management in the past year has definitely moved up one notch. Uncertainty about how to define enterprise risk management and the debate about the value of risk management have been replaced with more practical concerns on how to best implement a risk management program and how to measure the performance.
According to Julian Fry, Global Head of Operational Risk at Merrill Lynch & Co., Inc., who was a panelist at the conference, the top 10 risk management business issues within Financial Services and Investment Management companies are:
1) Proper business practices, 2) Internal fraud, 3) Knowing your client, 4) Transaction execution, 5) Client selection exposure, 6) Business disruption, 7) Product complexity/pricing, 8) Employment practices, 9) Accounting evaluation (sox), and 10) Back office operations.
You can download report on the conference from
http://www.logicmanager.com/contents/forms/register_ebizq.php
after registering on the site.
---------------------
Risk Management
Risk Management Philosophy
Risk-taking is an integral part of Merrill Lynch's core business activities. In the course of conducting its business operations, Merrill Lynch is exposed to a variety of risks. These risks include market, credit, liquidity, process, and other risks that are material and require comprehensive controls and management. The responsibility and accountability for these risks remain primarily with the businesses.
The Corporate Risk Management ("CRM") group ensures that these risks are properly identified, monitored, and managed throughout the firm. To accomplish this, CRM has established a risk management process, which includes:
A formal risk governance organization that defines the oversight process and its components.
A regular review of the entire risk management process by the Audit Committee of the Board of Directors.
Clearly defined risk management policies and procedures supported by the most appropriate and advanced analytic tools available.
Communication and coordination between the business, executive, and risk functions while maintaining strict segregation of responsibilities, controls, and oversight.
Clearly articulated risk tolerance levels as defined by the Executive Management Committee ("EMC") that are regularly reviewed to ensure that Merrill Lynch's risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
The risk management process, combined with CRM's personnel and analytic infrastructure, works to ensure that Merrill Lynch's risk tolerance is well-defined and understood by the firm's risk-takers as well as by its executive management. Other groups, including Audit, Finance, and Treasury, work with CRM to establish this overall risk management control process. While no risk management system can ever be absolutely complete, the goal of CRM is to make certain that risk-related losses occur within acceptable, predefined levels.
Risk Governance Structure
Merrill Lynch's risk governance structure is comprised of the Audit Committee, the EMC, the Risk Oversight Committee ("ROC"), the Risk Policy Group ("RPG"), the business units, CRM, and various corporate governance committees. The roles of these respective groups are as follows:
The Audit Committee is comprised entirely of external directors and has authorized the ROC to establish Merrill Lynch's risk management policies.
The EMC establishes risk tolerance levels for the firm and authorizes material changes in Merrill Lynch's risk profile. It also ensures that the risks assumed by Merrill Lynch are managed within these tolerance levels and verifies that Merrill Lynch has implemented appropriate policies for the effective management of risks. The EMC must approve all substantive changes to risk policies, including those proposed by the ROC. The EMC pays particular attention to risk concentrations and liquidity concerns.
The ROC, comprised of senior business and control managers and chaired by the Head of CRM, oversees Merrill Lynch's risks and ensures that the business units create and implement processes to identify, measure, and monitor their risks. The ROC also assists the EMC in determining risk tolerance levels for the firm's business units and monitors the activities of Merrill Lynch's corporate governance committees, reporting significant issues and transactions to the EMC and the Audit Committee.
The RPG is a working group of the ROC comprised of control managers and is chaired by the Head of CRM. The RPG reviews various risk-related issues and reports to the ROC.
Various other governance committees exist to create policy, review activity, and ensure that new and existing business initiatives remain within established risk tolerance levels. These committees include the New Product Review Committee, Debt and Equity Capital Commitment Committees, Real Estate Capital Commitment Committee, Credit Policy Committee, Reserve Committee, Special Transactions Review Committee, and the Structured Products Committee. Representatives of the principal independent control functions participate as voting members of these committees.
Risk Framework
CRM's chief monitoring and risk measurement tool is Merrill Lynch's Risk Framework ("Framework"). The Framework defines and communicates Merrill Lynch's risk tolerance and raises exceptions for certain areas of risk concentration. Exceptions and violations are reported and investigated at predefined and appropriate levels of management. The Framework and its limits have been approved by the EMC and the risk parameters that define the Framework have been reviewed by the Audit Committee. The EMC reviews the Framework annually and approves any material changes. The ROC reports all substantive Framework changes to the Audit Committee.
The Framework establishes aggregate and broad risk limits for Merrill Lynch. Market risk limits are intended to constrain exposure to specific classes and factors of market risk and Value-at-Risk ("VaR"). VaR is a statistical measure of the potential loss in the fair value of a portfolio due to adverse movements in underlying risk factors. Credit risk limits are intended to constrain the magnitude and tenor of exposure to individual counterparties, types of counterparties, countries, and financing collateral. The Framework has been established for CICG, PCG, MLIM, and Treasury. Each business is responsible for ensuring that its risk activities adhere to the limits established under the Framework. Individual Frameworks are continually refined to increase the granularity and scope of risk coverage.
Corporate Risk Management
CRM is an independent control function responsible for Merrill Lynch's risk management process. The head of CRM reports directly to the Chief Financial Officer, chairs the ROC and RPG, and is a member of the EMC. CRM manages Merrill Lynch's market and credit risks. Market risk is defined to be the potential change in value of trading instruments caused by fluctuations in interest rates, exchange rates, equity and commodity prices, credit spreads, and/or other risks. Credit risks are defined to be the potential for loss that can occur as a result of impairment in the creditworthiness of an issuer or counterparty or a default by an issuer or counterparty on its contractual obligations. CRM also provides Merrill Lynch with an overview of its risk for various aggregate portfolios and develops the systems and analytics to conduct all risk management functions. CRM is organized into the following four groups:
The CICG Market Risk Group is responsible for defining the products and markets in which CICG will transact and take risk. Moreover, it is responsible for identifying the risks to which CICG businesses will be exposed in these approved products and markets. The CICG Market Risk group also establishes the Framework market risk limits against which risk concentrations are monitored and controlled. Within the Group is a dedicated, separate quantitative unit that evaluates the efficacy of trading and risk models through stressing and testing the mathematical models used by various control and business units.
The Credit Risk Group assesses the creditworthiness of existing and potential individual clients, institutional counterparties and issuers, and determines firmwide credit risk appetite within Framework limits. The Group reviews and monitors specific transactions as well as portfolio and other credit risk concentrations. It is also responsible for ongoing credit quality and limit compliance, and the Group works with the business units of Merrill Lynch to manage and mitigate credit risk. A specialist unit that focuses on early problem asset identification and management is also part of the Credit Risk Group.
The Portfolio Risk Group has a variety of firmwide responsibilities including integrating market, credit and business risks through firmwide stress and event analysis, enhancing the internal attribution of economic capital to business units, and conducting country risk and rating assessments. The Group also has a Process Risk team that specifically focuses on the implementation of the firmwide process risk management program. In addition, the Portfolio Risk Group oversees the proprietary market risk taken within the Merrill Lynch Treasury function, PCG and MLIM.
The Risk Infrastructure Group provides CRM with the analytic, technological, and policy support necessary to quantify and monitor firmwide market, credit and portfolio risk.
Efficacy
CRM continuously reviews and refines its risk processes and methodologies. The overall effectiveness and responsiveness of CRM can be seen on a broader level when analyzing weekly net trading revenues over time. CRM policies and procedures for monitoring and controlling risk combined with the businesses' focus on customer order-flow driven revenues have helped Merrill Lynch to reduce earnings volatility within its portfolios. While no guarantee can be given regarding future earnings volatility, CRM continues to work on policies and procedures that assist the firm in measuring and monitoring its risks.
Market Risk
Merrill Lynch uses a variety of quantitative metrics to assess the risk of its positions and portfolios. In particular, CRM quantifies the sensitivities of Merrill Lynch's present portfolios to changes in market variables. These sensitivities are then utilized in the context of historical data to estimate earnings and loss distributions that Merrill Lynch's present portfolios would have incurred throughout the historical period. From these distributions, CRM derives a number of useful risk statistics including VaR. VaR is an estimate of the amount that Merrill Lynch's present portfolios could lose with a specified degree of confidence, over a given time interval. The VaR statistic for a particular risk category represents the amount that Merrill Lynch's present portfolios could lose due to past market movements in that specific risk category.
The VaR for Merrill Lynch's overall portfolios is less than the sum of the VaRs for individual risk categories because movements in different risk categories occur at different times and, historically, extreme movements have not occurred in all risk categories simultaneously. The difference between the sum of the VaRs for individual risk categories and the VaR calculated for all risk categories is shown in the following tables and may be viewed as a measure of the diversification within Merrill Lynch's portfolios. CRM believes that the tabulated risk measures provide some guidance as to the amount Merrill Lynch could lose in future periods and it works continuously to improve its measurement and the methodology of its VaR. However, like all statistical measures, especially those that rely heavily on historical data, VaR needs to be interpreted with a clear understanding of its assumptions and limitations.
In the Merrill Lynch VaR system, CRM uses a historical simulation approach to estimate value-at-risk using a 99% confidence level and a two-week holding period for trading and non-trading instruments. Sensitivities to market risk factors are aggregated and combined with a database of historical biweekly changes in market factors to simulate a series of profits and losses. The level of loss that is exceeded in that series 1% of the time is used as the estimate for the 99% confidence level VaR. The overall total VaR amounts are presented across major risk categories, including exposure to volatility risk found in certain products, e.g., options.
Credit Risk
Merrill Lynch's Credit Risk Group uses a variety of methodologies to set limits on exposure resulting from a counterparty or issuer failing to perform on its contractual obligations. The Group performs analysis in the context of industrial, regional and global economic trends and incorporates portfolio and concentration effects when determining risk appetite. Credit risk limits take into account measures of both current and potential exposure and are set and monitored by broad risk type, sub-product type and tenor to maturity. Credit risk mitigation techniques include, where appropriate, the right to require initial collateral or margin, the right to terminate transactions or obtain collateral should unfavorable events occur, the right to call for collateral when certain exposure thresholds are exceeded, and the purchase of credit default insurance. With senior management involvement, Merrill Lynch conducts regular portfolio reviews, monitors counterparty creditworthiness, and evaluates transaction risk with a view toward early problem identification and protection against unacceptable credit-related losses.
In 2000, the Credit Risk Group introduced enhanced methods to assist in the management of Merrill Lynch's credit risk. The Credit Framework now includes increased product and tenor granularity, and the Group has made enhancements to Merrill Lynch's internal credit rating and counterparty review process.
Credit risk and exposure that originates from Merrill Lynch's retail customer business is monitored constantly by CRM. Exposures include credit risks for mortgages, home equity lines of credit, margin accounts and working capital lines that Merrill Lynch maintains with certain small business clients. These exposures are collateralized in accordance with regulatory requirements governing such activities.
Merrill Lynch enters into International Swaps and Derivatives Association, Inc. master agreements or their equivalent ("master netting agreements") with each of its derivative counterparties as soon as possible. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable receivables and payables with the same counterparty to be offset on the Consolidated Balance Sheets, providing for a more meaningful balance sheet presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral, principally U.S. Government and agencies securities, on certain derivative transactions. From an economic standpoint, Merrill Lynch evaluates default risk exposures net of related collateral.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate its default risk on derivatives whenever possible by entering into transactions with provisions that enable Merrill Lynch to terminate or reset the terms of its derivative contracts.
Process Risk
Process Risk Management is an evolving risk management discipline. Merrill Lynch defines process risk as the risk of loss resulting from inadequate controls or business disruption relating to people, internal processes, systems, or external events. Examples of process risks faced by the firm include systems failure, human error, fraud, major fire, or other disasters.
Merrill Lynch manages process risks in many ways including maintaining strong corporate principles of value, appropriately training employees, maintaining a comprehensive system of internal controls, using technology to automate processes and reduce manual errors, monitoring risk events, employing experienced personnel, maintaining certain backup facilities, conducting internal audits, and emphasizing the importance of management oversight. In addition, Merrill Lynch has established a process risk management group within CRM to focus on further enhancing the management of these risks.
This Group manages a firmwide process risk management framework and has developed policies and procedures aimed at establishing a consistent approach to identify, monitor, and manage process risks across all business lines. Within this framework, the Group has created business line steering committees to coordinate process risk management efforts. The Group uses a variety of risk management tools and techniques to reinforce the firm's strong risk management culture. These include summarizing and monitoring process-risk-related losses on a regular basis, developing risk indicators to facilitate proactive risk management capabilities, and self-assessments to identify risks, corresponding controls, and measure improvement.
Other Risks
Liquidity risks arise in the course of Merrill Lynch's general funding activities and in the management of its balance sheet. This risk includes both being unable to raise funding with appropriate maturity and interest rate characteristics and the risk of being unable to liquidate an asset in a timely manner at a reasonable price. For further information on how Merrill Lynch manages liquidity risk, see the Capital Adequacy and Liquidity section.
Merrill Lynch encounters a variety of other risks, which have the ability to impact the viability, profitability, and cost effectiveness of present or future transactions. Such risks include political, tax, and regulatory risks that may arise due to changes in local laws, tax statutes, or regulations. To assist in the mitigation of such risks, Merrill Lynch rigorously reviews new and pending legislation and regulations. Additionally, Merrill Lynch employs professionals in jurisdictions in which the company operates to actively follow issues of potential concern or impact to the firm and to participate in related interest groups.
Tuesday, October 30, 2007
Risk in Underwriting
Merchant bankers have to sheel out Rs 300 Cr to rescue Cairn IPO
Economic Times 3 Jan 2007
The retail portion was subscribed 0.67 times.
The HNI category fared worse at 0.36 times.
the balance was subscribed by the merchant bankers of the issue, Merrill Lynch, Morgan Stanley and ABn rothschild
Economic Times 3 Jan 2007
The retail portion was subscribed 0.67 times.
The HNI category fared worse at 0.36 times.
the balance was subscribed by the merchant bankers of the issue, Merrill Lynch, Morgan Stanley and ABn rothschild
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