Risk Management at Macquarie Stephen Allen Group Head

Transcription

1 Risk Management at Macquarie Stephen Allen Group Head Macquarie Group Limited Operational Briefing 8 February 2011 Presentation to Investors and Analysts

2 No change in risk management principles Macquarie s risk management principles have remained largely stable over 30 years and served the Group well over the past few years The key aspects of Macquarie s risk management approach are: Ownership of risk at the business level Business heads responsible for identifying risks within their businesses and ensuring these are managed appropriately. Seek a clear analysis of the risks before taking decisions. Understanding worst case outcomes Risk management approach based on examining the consequences of worst case outcomes and determining whether risks can be tolerated. Adopted for all material risk types and often achieved by stress testing. Requirement for independent sign-off by Risk Management Risk Management Group (RMG) signs off all material risk acceptance decisions. For material proposals, RMG opinion sought at the early stage in decision making process, and independent input from RMG on risk and return is included in the approval document submitted to senior management. Macquarie s approach to risk is supported by the Risk Management Group Macquarie determines aggregate risk appetite by assessing risk relative to earnings, more than by reference to capital 2

3 No change in risk management principles Risk Management Group (RMG) is responsible for assessing and monitoring risks across Macquarie RMG s oversight of risk is based on five key principles: Independence Centralised prudential management Approval of all new business activities Continuous assessment Frequent monitoring RMG is independent of the operating areas of Macquarie Head of RMG, as Macquarie s Chief Risk Officer, reports directly to the Managing Director and Chief Executive Officer, with a secondary reporting line to the Board Risk Committee (BRC) Replacement, appointment, reassignment or dismissal of the Head of RMG is approved by the BRC RMG s responsibility covers the whole of Macquarie. Therefore, it can assess risks from a Macquarie-wide perspective and provide a consistent approach across all operating areas RMG approval is required for all material risk acceptance decisions Operating areas cannot undertake new businesses or activities, offer new products, or enter new markets without first consulting and then obtaining subsequent approval from RMG RMG reviews and assesses risk and sets prudential limits. Where appropriate, these limits are approved by the Executive Committee and the Board RMG Operational Risk is the final signoff of new business activities RMG continually reviews risks to account for changes in market circumstances and developments within Macquarie s operating areas Centralised systems exist to allow RMG to monitor credit and market risks daily. RMG staff liaise closely with operating and support divisions 3

4 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec Foreign Exchange -AUD/JPY Macquarie stress test Macquarie stress test -50 Interest Rates - USD Cash Rate Metals - Copper Daily change (bp) Daily % change Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Daily % change Dec-10 Dec-10 Macquarie stress tests generally exceeded the observed market volatility Macquarie stress test Macquarie stress test Equities - Hang Seng Index Macquarie stress test 40 Macquarie stress test Daily % change -30 Macquarie stress test Macquarie stress test -40 4

5 Some enhancements in response to the changing environment Few adjustments to limit framework: approach has always been concentrated on the tail events, not on statistical models Main changes as follows: Dec 07: Replacement of Equity Market Driver Macro-Economic Linkages (MEL) scenario with a more broad Market Contagion MEL scenario. The new scenario included a much larger range of market movements. For example, corporate margin shocks, hedge fund net asset value shocks and increased equity correlations Early 09: Ratings based credit spread shocks were replaced across all scenarios by relative shocks based on current spreads. In addition, direct price shocks were introduced for securitised products and distressed debt Jan 10: Market Contagion MEL scenario was updated to reflect the observation that Emerging Market FX rates and bond prices can experience large highly correlated downward movements 5

6 Some enhancements in response to the changing environment While the principles around risk management have remained stable over the years, our approach evolves in response to changing business needs Examples include: Staffing: Increasing RMG staff numbers in relevant offices globally to ensure appropriate resourcing and effective risk oversight Organisation structure: Combined the business-aligned compliance staff with RMG compliance to create a single compliance team Limits: Adapting our risk limits structure to effectively support the evolving business activities. Increased recognition of global market correlation and contagion effects Process: Undertaking a number of initiatives to enhance the effectiveness and efficiency of the New Product and Business Approval (NPBA) process in response to a higher level of business activity Oversight: Appointing a Macquarie-wide General Counsel responsible for Macquarie's legal functions globally 6

7 Total RMG headcount has grown in-line with business expansion As at 31 Dec 10, there were 396 RMG staff globally 1, up from 359 in 31 Mar 10 In addition to RMG staff, there are over 450 divisional risk staff throughout the globe Headcount % RMG vs MQG FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Dec RMG % RMG vs MQG 1. Permanent headcount, excluding contractors and consultants. 31 Dec 10 number does not include the integration of business Compliance staff. 7

8 RMG staff location aligned with geographic distribution of businesses Significant growth in the number of staff located outside of Australia EUROPE, MIDDLE EAST & AFRICA Staff in 2005: 12 Staff in 2010: 70 ASIA Staff in 2005: 10 Staff in 2010: 38 AMERICAS Staff in 2005: 9 Staff in 2010: 71 AUSTRALIA Staff in 2005: 116 Staff in 2010: Permanent headcount, excluding contractors and consultants. 31 Dec 10 number does not include the integration of business Compliance staff. 8

9 RMG is experienced at applying risk management principles to changing business mix Macquarie s mix of businesses have always evolved and changed 40% of income comes from businesses that didn t exist 5 years ago 1 Macquarie has a track record of integrating businesses including: BT Australia (1999), ING Asia (2004), Macquarie Cook Energy (2005), Constellation (2009) Current changes to the business mix include: Increased corporate lending; expanded leasing activities (e.g. aircraft); expanded funds management activities (e.g. Delaware); new trading markets (e.g. FICC Asian Markets) and new business structures (e.g. Debt Capital Markets) RMG is heavily involved in new acquisitions Assessment of risks: The risks of acquisitions are identified as part of the new business approval process, and managed effectively through integration projects Planning for implementation: For each acquisition, there is an appropriate plan to roll out the risk management framework Risk culture transfer: Integration emphasises the transfer of Macquarie s risk culture to new businesses Post-acquisition audit: a post-acquisition review of operations is conducted by Internal Audit within 6 to 12 months 1. Noted in the 2009 Annual General Meeting Presentation. 9

10 Successful integration of acquisitions Business Acquiring Business Strategic rationale Key transitional tasks Blackmont Capital Canadian wealth management Banking and Financial Services Grow wealth management business in Canada Provide retail distribution to existing capital markets business and product offerings in Canada Role of RMG RMG are a key stakeholder in integration planning Participation of RMG stakeholders on integration committees Constellation Energy US natural gas trading Delaware Investments US funds management Fox-Pitt Kelton Cochran Caronia Waller US advisory Sal. Oppenheim European equity derivatives, cash equities business Tristone Capital Energy advisory Fixed Income, Currencies and Commodities Macquarie Funds Group Macquarie Capital and Macquarie Securities Macquarie Securities Macquarie Capital and Macquarie Securities Enhance Macquarie's position within North American natural gas market Develop global asset management capability Gain broader access to the world's largest capital market - the United States Enhance FIG sector expertise and further increase presence in the US Derivatives: complement existing Asian operation and add wider set of products to growing European business Cash: broadens existing pan-european reach Enhance global energy offering Determination of how the framework is to be applied Oversight of progress of integration and achievement of milestones Training Some specific examples Constellation and Sal. Oppenheim - RMG was involved in specifying, building and testing requirements for the data feeds to capture and monitor exposures Delaware full review and gap analysis between Delaware and Macquarie policies RMG Credit and Market Risk presence in Houston expanded following Constellation acquisition RMG Market Risk and Macquarie Compliance presence placed with Sal. Oppenheim business in Frankfurt 10

11 Expanding regulatory footprint Business expansion around the globe creates new regulatory obligations e.g. FICC Asian Markets will utilise the Singapore branch of Macquarie Bank Limited Risk Management Group is experienced in managing regulatory relationships with over 100 regulators globally This creates increasing obligations, however to date these have not created an uncommercial burden Some of Macquarie s main regulatory relationships Region Regulators EMEA Europe & UK Financial Services Authority Federal Financial Supervisory Authority (BaFin) London Stock Exchange London Metals Exchange Middle East South Africa Dubai Financial Services Authority Financial Services Board JSE Limited North America United States Canada Federal Reserve Board Securities and Exchange Commission Financial Industry Regulatory Authority Ontario Securities Commission Toronto Stock Exchange Commodity Futures Trading Commission Federal Energy Regulatory Commission National Futures Association IIROC Asia Hong Kong South Korea Singapore India Japan China Securities and Futures Commission Financial Services Commission Monetary Authority of Singapore Reserve Bank of India Financial Services Agency China Securities Regulatory Commission Hong Kong Exchange and Clearing Ltd Korea Exchange Singapore Exchange Ltd Securities and Exchange Board of India Australia Australian Prudential Regulation Authority Australian Securities and Investments Commission Australian Transaction Reports and Analysis Centre Australian Competition & Consumer Commission 11

12 Basel III and other regulatory changes Basel Committee on Banking Supervision released final text of the Basel III framework in Dec 10 covering: Revised capital rules A new liquidity framework Final text largely consistent with the press releases on 26 Jul and 26 Sep 10 by the Group of Governors and Heads of Supervision The Basel committee also released further guidelines covering loss absorption of capital at the point of non-viability ( gone concern measures) in Jan 11 These new requirements imply that no existing Australian Tier 1 hybrids will be eligible under Basel III However, they are expected to be eligible for transitional arrangements. As such,10% will become ineligible annually beginning in 2013 Capital buffer levels have been specified Countercyclical buffer of between zero and 2.5%, the latter to apply where excess credit growth exists in the economy Minimum leverage ratio of 3% (i.e. maximum 33x leverage) to be reported from 1 Jan 15 Significant regulatory changes in other markets that we operate in e.g. US Dodd-Frank Wall Street Reform and Consumer Protection Act 12

13 Basel III and other regulatory changes Some uncertainties remain Basel is currently undertaking a quantitative impact study (QIS) of changes to credit valuation adjustment (CVA) methodology and the capital requirements for bank exposures to central counterparties final methodologies expected later in 2011 The Bank for International Settlements (BIS) rules are subject to implementation by APRA Revised capital rules Our current assessment is that Macquarie has sufficient capital to meet the Basel III capital requirements and the leverage ratio requirements A new liquidity framework APRA has proposed that liquid assets can be satisfied with assets that are eligible for repo with the RBA (pricing is yet to be announced) This outcome should resolve the previous difficulties for Australia resulting from the Basel definition of liquid assets 13

14 The risk management framework is well placed to support our business activity going forward Our risk management principles will remain constant but we will continue to evolve their application Significant level of change in the finance industry, resulting in a more complex business environment but we are used to dealing with change We will continue to review our businesses and the risks they face We remain confident that our risk culture and multiple controls are able to support our growing business activity 14

15 Macquarie Group Limited Operational Briefing 8 February 2011 Presentation to Investors and Analysts