Source: Buy Side Risk Managers Forum
The Buy Side Risk Managers Forum (BSRF) announced today the release of "Risk Principles for Asset Managers."
The group, which was chaired by David Martin, Sr. Vice President/Chief Risk Officer of Alliance Bernstein L.P. and Kenneth Winston, Managing Director/Chief Risk Officer of Morgan Stanley Investment Management, included senior risk officers from major buy-side firms as well as advisors, Leslie Rahl and Barbara Lucas of Capital Market Risk Advisors (CMRA.).
"Good risk management has never been more important. These Principles are especially timely in light of current events," said David Martin. "As markets and risks evolve, risk management must evolve as well." "Risk management is both quantitative and qualitative," added Ken Winston. "These principles reflect a growing awareness that risk management involves more than measuring and monitoring risk to prevent unanticipated loss. It serves a far broader purpose - optimizing the relationship between risk and reward." While these principles are intended to provide useful guidance to asset managers, they are not intended to be prescriptive. One size clearly fits no one.
The Principles are the product of a collaborative effort by a working group composed of representatives of many of the largest asset management companies. Input was also obtained from regulators and other market participants. "We are delighted to be able to introduce this important document at such a critical time in the financial markets," said Barbara Lucas, a partner at CMRA. "We believe that it should provide an important framework for best practice in risk management and that the discussion of risk governance and valuation are particularly critical in today's market environment," added Leslie Rahl, founder and President of CMRA.
The Principles address a wide range of risk management issues, including risk governance, investment risk management, and operational risk management. Key governance principles include creating organizational checks and balances through segregation of functions and independent control groups, the need for formal excepeption and escalation policies, the importance of the role of senior management in creating a risk conscious culture as well as the need for risk to be everyone's responsibility.
With respect to investment risk management, the Principles highlight the importance of measuring and monitoring various aspects of investment performance and risk utilizing a combination of metrics as opposed to a single metric. As has been vividly demonstrated by current events, and as is detailed in the Principles, measuring and monitoring liquidity, concentration and leverage risk is critical. Significant emphasis is also place on the importance of using fair, consistent and well-documented valuation methodologies and stress-testing assumptions as well as the importance of tracking and managing issuer and counterparty credit risk.
The Principles also address the importance of measuring and monitoring operational risk, identifying and controlling model risk, having adequate systems, backup and disaster recovery and effective records management and systems security.