Knowledge, Skills and Abilities Needed for
Effective Risk Management
William May
Senior Vice President FRM Program Manager
Global Association of Risk Professionals
Evolution of Risk Management
•
Risk management as a profession barely existed 20
years ago
•
How did we get here from there?
•
Risk management solutions
•
Risk measurement techniques
•
Computational power
•
Buy-side pull
•
Notable risk management failures
Risk Management Role in Current Crisis
•
Risk measurement
•
Risk models misused or misspecified?
•
Understanding of liquidity, correlation
•
Effective use of stress testing
•
Risk mitigation
•
Hedges viewed in isolation?
•
Risk reporting and communication
•
Did risk managers speak-up?
•
Was anybody listening?
•
Risk culture
Lessons Learned
Risk Management Lessons Worth Remembering
• By Ben Golub and Conan Crum (Blackrock)
1.
Risk management requires institutional buy-in
2.
The alignment and management of institutional interests are critical to
risk management
3.
Institutions need an independent risk management organization with
strong subject-matter expertise
4.
Institutions need to understand their fiduciary responsibilities to their
clients
5.
While a top-down perspective is necessary, a bottoms-up risk
management process is vital
6.
Institutions need to get portfolio managers to think like risk managers
7.
Risk models require vigilance and skepticism
Impact on the Practice of Risk Management
•
Accountability at all levels
•
Greater participation from senior management
•
Stronger risk cultures
•
Greater emphasis on big picture, integration
•
New regulatory initiatives
•
Basel III; Dodd-Frank, Fed/FSA
•
Increased quant skepticism
•
Greater emphasis on stress testing
•
Identified need for better understanding, monitoring of liquidity
and correlations
Development of a Risk Professional
• GARP
• Not-for-profit association, founded in 1996
• GARP's mission is to advance the risk profession through education, training and the promotion of best practices globally
• Governed by Board of Trustees comprised of leading risk executives
• Offices in Jersey City, NJ and London
• Financial Risk Manager (FRM®) program
• Objective: Assess an individual’s ability to measure and manage risk in a real-world environment
• 1997 (108, 6) … 2011 (26,000+, ~100)
• Over 21,000 certified FRMs globally
• FRM Committee comprised of senior risk managers and researchers
• Prof. René Stulz, Ohio State University, Chair
• Designed to reflect the knowledge, skills, and abilities demanded by the risk management profession
Risk Manager Job Task Analysis
•
FRM Job Task Analysis
•
Study done in 2011 to determine the current knowledge, skills
and abilities required to perform the job of financial risk
managers around the world
•
Designed to provide detailed information to:
• Identify those tasks performed by financial risk managers in various countries and regions around the world and the knowledge, skills and abilities (KSAs) that are required to perform those tasks
• Provide information for an examination specification indicating the content and weighting for future FRM examinations
Tasks Identified as Important and Frequent
•
Data Collection
•
Gather internal (position) data and external (market) data
•
Identify required model inputs
•
Validate data
•
Modeling and Analysis
•
Identify risk exposure and risk factors
•
Implement and validate risk models
•
Identify model limitations
•
Interpret statistical analyses
•
Conduct stress and scenario analyses
•
Communication and Reporting
•
Identify risk tolerance
•
Gather policy and regulatory information
Required Knowledge Set
•
Knowledge of:
• Types of risk: market, credit, operational, liquidity, enterprise
• Types of factors : market risk credit risk liquidity risk operational risk
• Asset types and their characteristics • Asset pricing
• Basic assets Plain Vanilla Derivatives Complex Assets
• Basic statistical processes and probability distributions
• Statistical and economic relevance of results
• Theories, assumptions, limitations and goals behind VaR analysis • Impact of inputs, parameters, etc. on the outcome of a risk model • Stress testing and scenario analyses
• Theories, assumptions, limitations and goals behind stress and scenario analyses
• Factors that affect risk appetite
• Industry standards for policies and procedures • Applicable regulatory framework(s)
Required Skill Set
•
Skill in:
•
Identifying sources of internal data (e.g., historical data, process
produced data, etc.)
•
Determining the quality and applicability of the data for a given task
•
Identifying the limitations of a risk model
•
Classifying asset characteristics
•
Determining the relationship between the risk type and the price of
the asset
•
Breaking down assets into individual components in a structured
product
•
Judging the appropriateness of an organization's policies and
procedures against industry best practices and/or regulations
•
Determining the flow of relevant risk information within an
organization
Required Abilities
•
Ability to:
• Validate proper data for a specific analysis • Visually interpret data in graphic form
• Identify relationships and dependencies between asset classes
• Determine which risk factors apply to a given situation and the interaction between them
• Confirm that a risk model is producing unbiased results • Validate a risk model and evaluate its effectiveness
• Perform back tests
• Calculate metrics (including appropriate use of formulas) • Determine the limitations of risk metrics
• Perform liquidity risk analysis
• Perform stress testing and scenario analyses
• Interpret and evaluate the results of stress tests and scenario analyses • Understand the impact on policy decisions or directions on risk
(New) Requirements of a Risk Manager
•
Being able to determine the applicability, sufficiency
and validity of an existing risk model, understanding its
limits and sensitivities to inputs and external factors
•
Being able to execute stress testing and scenario analysis
and to interpret and evaluate the results
•
Being able to evaluate a situation broadly and to
understand the influence of external factors (e.g.,
macroeconomic, reputational, political, etc.)
•
Strong communication skills, being able to accurately
and concisely explain and present risk reports, policies,
limits and results
Keys to a Strong Risk Management Function
•
Data
•
Strong computer skills
•
Modeling
•
(Relatively) strong quant skills
•
Market awareness
•
Deep, practical understanding of products and macroeconomic
trends
•
Analysis
•
Intellectual curiosity and independence – rock the boat, ask the
questions, challenge the establishment, general skepticism
•
Reporting
The FRM Program
• Two-part program
• Part I curriculum covers the tools used to assess risk
• Foundations of Risk Management (20%)
• Quantitative Analysis (20%)
• Financial Markets and Products (30%)
• Valuation and Risk Models (30%)
• Part II curriculum focuses on the practical application of those tools
• Market Risk Measurement and Management (25%)
• Credit Risk Measurement and Management (25%)
• Operational and Integrated Risk Management (25%)
• Risk Management in Investment Management (15%)
• Current Issues in Financial Markets (10%)
Part II Exam
(4 hours, 80 MCQ)
Part I Exam
(4 hours, 100 MCQ)
Demonstrate two years relevant work experience Certified Financial Risk Manager (FRM®) Voluntary Continuing Education 40 hours/2 years
The FRM Exam Process
• Outlines topics and readings for Part 1 and Part 2 Exams
• Developed annually by FRM Committee
• Insight from Certified FRMs and risk community Download 2012 FRM Study Guide • Register on GARP website: www.garp.org/frm • Leverage candidate resources, including practice exams, books, course packs, FRM training providers
Register And Prepare
• Developed with input from FRM Committee, certified FRMs and other risk professionals
• 4 Hour exam, 100 Multiple Choice Questions
• May 19, 2012, Morning Session
Sit for Part 1 Exam
• Developed with input from FRM Committee, certified FRMs and other risk professionals
• 4 Hour exam, 80 Multiple Choice Questions
• May19, 2012, Afternoon Session
Sit for Part 2 Exam
Growth of the FRM Program
• Average growth of 32% in registered candidates per year since 2000
• Exams offered in 92 locations around the world in 2012
• Registrants come from every major financial institution, consulting firm, regulatory body, and academic institution and represent thousands of firms globally
• 100,000th FRM candidate registered for the November 2010 exam
Currently, there are over 21,000 Certified FRMs
0 5,000 10,000 15,000 20,000 25,000 30,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 FRM Exam Registrations Full Exam Part I Exam Part II Exam
Acceptance of the FRM Program
• Represent every major banking institution,
government regulator, consulting firm and financial services institution around the world
Diversity of FRM Candidates
Distribution of FRM Test Takers – November 2011
34% 21% 8% 8% 7% 7% 3% 13%
Banking
University
Non-bank Financial
Consulting Firm
Risk Management
Asset Management
Regulatory Agency
Other
Strengthening the FRM Program
•
FRM Part I Books with Pearson
• Including actual FRM questions
•
Global Job Task Analysis
•
University Partnerships
• Working with universities globally to develop and enhance risk curricula and to directly embed the FRM examination into academic programs
•
Continuing Professional Education
• Launched in late 2010
FRM Candidate Resources
• 2012 FRM Study Guide (Free) • 2012 FRM AIMS (Free)
• 2012 FRM Exam Preparation Handbook (Free) • 2012 FRM Practice Exams (Free)
• 2012 FRM Part 1 Books ($250 + shipping) • 2011 FRM Part 2 Course Pack
- Print & e-access: $440 + shipping • - e-access only: $340
• FRM Training Course Providers • Local Study Groups
• GARP Website • GARP Chapters
Learning More and Connecting with GARP
•
Learn more about the FRM Program, including Exam
preparation resources at:
www.garp.org/frm
Email:
[email protected]
•
Connect with other Certified FRMs and FRM Exam
candidates at:
www.facebook.com/garpfrm
www.linkedin.com – search via term “GARP LinkedIn”
•
Follow GARP on Twitter:
Creating a culture of risk awarenessTM
Global Association of Risk Professionals
111 Town Square Place Suite 1215
Jersey City, New Jersey 07310 USA
+ 1 201.719.7210 Minster House, 1st Floor 42 Mincing Lane London EC3R 7AE UK
+ 44 (0) 20 7397 9631
www.garp.org
© 2011 Global Association of Risk Professionals. All rights reserved.
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 risk management practitioners and researchers from banks, investment management firms, government agencies,
academic institutions, and corporations from more than 195 countries. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®) exams;
certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels. www.garp.org.
