As asset managers pursue multiple or complex investment styles, product risk, investment risk and market risk are becoming prime considerations.
3. Set appropriate governance for investment risk that is consistent with the firm's risk appetite; involve risk as early in the product life cycle as possible.
Given the concerns around mis-selling of products such as “guaranteed return” products, it came as little surprise that TCF risk came highest in terms of the CRO's chief concern. It is evident that risk management must align with how clients have been sold products.
As part of industry leading practice, risk should therefore be consulted as early in the cycle of making all significant business decisions as possible, including those opening new funds, manufacturing new products or entering new markets.
Products should be brought to market as efficiently as possible without firms feeling the need to rush particular processes. Firms should apply particular care and due diligence to products that are difficult to value, trade in a non-transparent fashion, or are not fungible.
Firms should consider setting the appropriate level of governance for investment risk and ensure effective cross-linkage with risk appetite statements and with operational risk management. Firms should also devise a scorecard or similar methodology for evaluating product pricing for all new products and markets and ensure that risks are priced appropriately.
Ideally, this could extend to developing more of an “enterprise view” for investment risk with key investment indicators (KIIs) devised and socialized, with attribution performed on a product-by-product level.
Many firms have already taken the necessary steps to enhance performance by fully automating their front offices (audit trails, IOIs, OMS/EMS tools, TCA tools). Given greater regulatory focus, firms should place higher weight on the presence of evidence with OTC trades, or illiquid, complex or leveraged products.
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