Session 3 Flashcards
What are the 3 lines of defense in risk management?
Employees/Managers
Risk Management & Compliance
Internal audit
What is the stand alone risk managment function senior head called?
Chief risk officer (capable of independent thought & action)
Why is the risk management dpt a independent from others?
To ensure the risk are taken seriously and balanced against other goals such as profitability
What do risk managers do?
assess, monitor & report on risk (may have approval/veto authority)
Who is responsible of risk management?
Everyone. It is the portfolio
managers or traders, who own the risk of their deals. Since they know best what’s in their portfolio, they must manage the risk
What is the risk management challenge?
Having a structured organization distinguishing the necessary risk management functions
Why is it important for risk management to be part of teh company culture and fully integrated with core business activities?
Because at the end of the day the business decisions lie with the decision makers not the risk managers.
Where is risk management in the trading process?
Everywhere
In the trading function (front office)
In the middle office (compliance, risks taken, capital adequacy)
In the record keeping (back office)
Explain the 3 lines of defense in detail
Front-line employees and managers, through their daily responsibilities, form
the first line of defense.
The risk management and compliance department operate as a second
line of defense, assisting and advising employees and managers while maintaining a
certain level of independence.
An internal audit function then forms the third line of defense.
Risk and audit committees of the board will often hear presentations from the
heads of risk management, compliance, and internal audit.
What does the front office do?
guarantee the quality and completeness of incoming transactions
propose pricing models for its products
hedge daily instruments in the position
ensures the first level of risk control and must respect the allocated limits
What does the middle office do?
Daily validation of market data needed for daily P&Ls and risk measurements
Second-check on back office inventory and front office cash flow reconciliations
produce and analyze daily results of managemnt
produce daily VaR (risk indicators) and confront them with limits
pre-analysis on indicators
Produce and back-test theoretical P&Ls
send results + risks to consolidation tool and publish daily repost for mngmnt, FO, risk management
What does the quantitative risk research department do?
Validates models proposed by FO (independent from them)
quantitative support for business monitoring and risk management
What does the data management dpt do?
Is the guarantor of the availability and quality of historical market data needed to produce results, sensitivities and VaR
What does the risk management department do?
Defines methods for measuring market risks
* Investigate the risks associated with new products
* Instructs requests for limits and notifies overruns
* Supports activity monitoring for apprehension of exotic or illiquid parameters
* Analyzes the risks and defines the reductions.
* Calibrates stress scenarios
* Leads or participates in transversal committees
What are the 3 major risks for a banK?
Market risk, credit risk, operational risk
