NEW YORK – The Buy Side Risk Managers Forum (BSRF) has published “Risk Principles for Asset Managers”, which addresses a wide range of risk management issues, including risk governance, investment risk management and operational risk management.
The principles are the product of a collaborative effort by a working group composed of representatives of many of the largest asset management companies. The group, which was chaired by David Martin, senior vice-president/chief risk officer of Alliance Bernstein, 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 Leslie Rahl and Barbara Lucas of Capital Market Risk Advisors.
The principles highlighted key governance principles such as creating organisational checks and balances through segregation of functions and independent control groups, the need for formal exception 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. In risk management, they focus on the importance of measuring and monitoring various aspects of investment performance and risk utilising a combination of metrics as opposed to a single metric. Measuring and monitoring liquidity, concentration and leverage risk is also critical. Significant emphasis is also placed 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, back-up and disaster recovery, and effective records management and systems security.
"Good risk management has never been more important,” said Martin. “These principles are especially timely in light of current events. As markets and risks evolve, risk management must evolve as well.”
“Risk management is both quantitative and qualitative,” said 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 – optimising the relationship between risk and reward.”
The BSRF was formed in 2003 to bring together heads of risk management or chief risk officers at traditional buy-side – asset or investment management – companies, which explores risk management practised by other institutions such as banks, broker-dealers, insurance companies and hedge funds.