Knowledge, Skills and Abilities Needed for Effective Risk Management William May Senior Vice President FRM Program Manager Global Association of Risk Professionals February 2012
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 Regulatory Initiatives
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 Clouded by strong performance and compensation structure?
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 8. Institutional risk management does not mean risk avoidance
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 realworld 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 Develop risk reports, presentations, etc.
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 Communicate recommendations
(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 Strong communication skills
The FRM Program Part I Exam (4 hours, 100 MCQ) Part II Exam (4 hours, 80 MCQ) Demonstrate two years relevant work experience Certified Financial Risk Manager (FRM ) Voluntary Continuing Education 40 hours/2 years 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%)
The FRM Exam Process Download 2012 FRM Study Guide Register And Prepare Sit for Part 1 Exam Sit for Part 2 Exam Outlines topics and readings for Part 1 and Part 2 Exams Developed annually by FRM Committee Insight from Certified FRMs and risk community Register on GARP website: www.garp.org/frm Leverage candidate resources, including practice exams, books, course packs, FRM training providers Developed with input from FRM Committee, certified FRMs and other risk professionals 4 Hour exam, 100 Multiple Choice Questions May 19, 2012, Morning Session Developed with input from FRM Committee, certified FRMs and other risk professionals 4 Hour exam, 80 Multiple Choice Questions May19, 2012, Afternoon Session
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 30,000 FRM Exam Registrations 25,000 20,000 15,000 Full Exam Part I Exam Part II Exam 10,000 5,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Acceptance of the FRM Program 732 organizations have five or more FRM Candidates Top 20 companies with the most FRM Holders 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 3% 7% 7% 8% 8% 13% 21% 34% 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 Exam Preparation Handbook
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 Social Media: LinkedIn, Facebook
Learning More and Connecting with GARP Learn more about the FRM Program, including Exam preparation resources at: www.garp.org/frm Email: frm@garp.com 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: @GARP_Risk
Creating a culture of risk awareness TM 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 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. 2011 Global Association of Risk Professionals. All rights reserved.