Algorithmics highlights the most influential op risk events of the past 15 years

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The most influential op risk events of the past 15 years involve market practice events, outright fraud, the role of press coverage and management response, according to Algorithmics’ First database. In detailing these older cases in its monthly newsletter, Algorithmics seeks to stress the importance of evaluating the mistakes of the past to help avoid the same mistakes in today’s operating environment.

“These events demonstrate that although the new cases are vitally important to educational awareness programmes, self assessments, new product approvals and scenarios, the old cases should not be ignored. We continue to encourage our clients to revisit some of the older cases as they hold valuable lessons for today’s operating environment,” says Penny Cagan, a managing director at Algorithmics. “For instance, it is not such a large leap of imagination to look at cases such as those involving the derivatives blow-ups of 1994 after the Federal Reserve raised interest rates multiple times and gain insight into what risks may arise if we enter a similar situation today. We would need to account for differences, such as the role hedge funds play in the market today, but the lessons learned from the past decade are still relevant.”

One of the most interesting cases remembered in the newsletter is the Wall Street research analyst conflict-of-interest cases in 2002, where some 11 Wall Street firms agreed to a $1.4 billion settlement that was the result of a joint investigation by state and federal regulators and industry self-regulators, into the conflicting interests of the equity research and investment banking divisions of Wall Street players, as well as the practice of ‘spinning’ scarce shares of initial public offerings into favoured individuals’ accounts.

The case led to the re-evaluation of how fraud was investigated on Wall Street from the scrutiny of one-off fraud events, to the complete investigation of how firms conducted business and standard market practices. The resulting changes in legislation and regulation have had an impact on global markets and regulators, with Wall Street firms agreeing to insulate research analysts from investment bankers with strengthened Chinese walls. Research analysts are also required to publish their stock ratings and price target forecasts, independent research firms are required to provide ‘independent advice’ to retail investors for each firm involved and ‘spinning’ is completely banned.

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• Topics
• Operational risk
• Risk management
• Regulation
• Foreign exchange
• Structured products