Contributor: Marcus Cree
This month saw the Professional Risk Managers International Association (PRMIA) celebrate its tenth birthday in style at the Marriott Marquis in New York’s Times Square at its inaugural risk conference, sponsored in part by SunGard.
Even with the credit crisis behind us, ongoing issues with euro zone sovereignty risk, Basel III, the Volcker rule, the failure of MF Global, and the move to central clearing proved that there was plenty to talk about at the event. And if 2012 had not been eventful enough so far, J.P. Morgan’s announcement of a $2 billion loss on the eve of the conference both highlighted the profile of risk management and guaranteed a buzz at the party.
With the JPM news so fresh, speculation was high as to the root of the issue, with plenty of debate over whether risk management had failed, been ignored or experienced a miscalculation. The same three possibilities were equally discussed during the MF Global case earlier in the year. Conferences focused on risk management often delve into the status of risk management within larger financial firms, but rarely have such stark examples acting as fuel to the fire.
Of course, there were also more forward-looking discussions around dealing with regulatory reform and any unintended consequences thereof. A key area of discussion for the PRMIA audience was central clearing. Among the potential issues that could arise were concentration and liquidity risks within specific clearing exchanges, and the dramatic rise in the amount of collateral/margin required to conduct derivatives trades. The role of FCMs and their attendant business models also tail-ended those same debates.
The ongoing conversation about whether VaR or Expected Shortfall is the more effective risk metric was high on the agenda, as delegates pondered the usefulness of the two. In general, participants agreed that VaR/stressed VaR works for the capital calculations but that both measures should be looked at internally for prudent risk management, along with other tail-orientated risk measures and stress tests.
The plight of the euro zone was next on the hot topic list, as risk managers from across the U.S. and beyond discussed the theoretical and practical implications of sovereign risk in the developed European markets, the impact these have on credit spreads and default correlations, and how best to reflect political risk in underlying risk calculations and estimates.
The PRMIA audience also discussed the Volcker rule, both in terms of absolute compliance and monitoring of hedging and market making activities, as well as the equally worrisome effect on liquidity in the absence of prop trading. Interestingly, potential Volcker-led liquidity issues led back to the question of which risk measure (VaR/ES) can be best adjusted to reflect lower liquidity environments, the need for liquid central clearing, and the associated cost of margin/collateral.
There were also presentations on risk culture, model validity and enterprise-wide liquidity, operational, market and credit risk. Of course, these are all topics that in less stressed times could be top-of-mind at a risk conference, but were here relegated to bit players on a larger stage.
At the PRMIA conference the conversations were all different, yet connected. After 10 years of challenging risk management, it was a great way to celebrate. There has never been a stronger need for forums like this where risk professionals from across the industry can discuss, argue, share and move forward with peer-agreed best practice in a financial world that seems intent on challenging the resolve and commitment of risk departments everywhere.
While you’re here…