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Risk Management

Overview of Risk Management

The Tasks of a Market Risk Manager

A risk manager is tasked with measuring so many risks. Their mandate is broad and wide reaching: from measuring the size of the book to determining the right collateral is posted. The primary goals of Risk Management will help us drill down to the more granular risks to pay attention to:

  • Defend the castle would be the overarching statement
  • Defend firm’s market share
  • Protect firm’s profit margin
  • Secure budgets
  • Maintain stabilized pricing in market making operations
  • Eliminate surprises

Work closely with your analysts as well as sales people so you have all information on every trading desk, relationship manager (loans), client or prospect (asset purchases or mgmt.) and able to make final decisions.

Setting Up Risk Management Controls

  • Trading Desk (Business Unit) Level Policies Defined with respect to
    • Funding costs
    • Position limits
    • Risk limits: Define Frequency and process for:
      • Stress Testing reported VaR figures
      • Back Testing reported VaR Figures
  • Designing A Hedging Policy:
    • Approved Hedging Products
    • Maximum Tenor for Products
    • Maximum amount which can be unhedged
  • Schedule External Audits and Benchmarks
    • Hire an auditor or Independent Consulting Firm
    • Can provide good information for regulators
    • Can keep risk managers up-to-date on industry trends
  • Sales Desk (Business unit) level Policies Defined with Respect to
    • Customer Compliance
    • Risk Management should have a redundancy point of contact to ensure all clients documentation is in order; salespeople are following the prescribed workflows & credit department is receiving the information from client as agreed.
    • Sales Person Compliance: Pitchbooks, emails and other client correspondence are approved by Compliance. A file should be maintained at Risk Management Level for ease and facility if a file is needed for an investigation. This allows risk management to operate privately without divulging an investigation is in process.
  • Create an Internal Risk Management Committee
    • Each task above is apportioned to a person or group
    • Regular meeting schedule of all participants locally
    • Head of local Risk Management Committees meet regularly to share what they’ve learned locally
    • Risk Managers come from a wide array of areas of an institution. Make sure your team includes the expertise and backgrounds your firm needs.
      • Junior staffing can be found from other risk mgmt. areas for career growth. These positions should be filled internally, if possible.

This overview provides a very shallow overview of implementing and operating a Market Risk management group.

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