A high-level group of senior financial executives has called on investment banks and hedge funds to tighten up back office processes and improve counterparty communications and risk management practices in the booming OTC derivatives markets.
The Counterparty Risk Management Policy Group was initially established to report on measures to improve financial stability in the wake of the collapse of the Long Term Capital Management hedge fund in 1998. Although the group has no input into public policy, the recommendations from its first report have been accepted as risk management benchmarks by investment banks and regulators.
Its latest missive, 'Toward Greater Financial Stability: A Private Sector Perspective', picks up where the previous report ended and focusses on the spectacular growth in advanced financial products and the risks carried by large prime brokers and their secretive hedge fund clients.
The report offers 47 recommendations, with particular attention paid to improving risk management, risk monitoring and transparency in the global financial system. It calls for urgent action by financial firms to speed up and automate back office systems for settling trades in complex structured products, such as credit derivatives, whether or not the increased spend presents any short-term economic benefit.
Gerald Corrigan, managing director, Goldman Sachs and chairman of the Policy Group called upon senior management of individual financial institutions to review the recommendations and, where appropriate, take steps to bring their business practices in line with these standards.
Coincidentally, the US-based Asset Managers Forum (AMF) has unveiled 17 best-practice recommendations for improving straight-through processing in over-the-counter (OTC) derivatives. The recommendations, issued in a white paper at the AMF's annual swaps conference this week, address many of the issues raised by the CRMPG, including the requirement for improved documentation and automation of back office processes.
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