2010-04-13 / PRiM Risk Newsletter No 21 - Risk Management in Emerging Markets
Most of the risk management topics covered in past issues of the PRiM Risk Newsletter have been presented independent of any specific location. This issue is somewhat different in that regard, because it focuses on risk management in emerging markets and the unique challenges that those markets face. Our motivation in choosing this topic is to understand how those challenges add to the complexity of financial risk management and how they can be resolved in the future.
An additional aspect to be considered is the role of Luxembourg in helping to improve risk management in emerging markets through a transfer of the knowledge available in the Grand Duchy. In that context, it is no coincidence that the ATTF, the Agence de Transfert de Technologie Financière (Financial Technology Transfer Agency), is mentioned often in this Newsletter. The ATTF was created in 1999 by the Luxembourg government to provide technical assistance in financial matters (primarily training and consulting) to developing countries and countries in transition (now numbering 38) and to promote Luxembourg as a financial centre in those partner countries and regions. PRiM and its members have often collaborated with the ATTF to provide risk management expertise to a wide range of emerging markets. Much of the information presented in this issue comes from PRiM members who conducted training courses on risk management on behalf of the ATTF.
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2010-01-07 / PRiM Risk Newsletter No 20 - The Future of Risk Measurement
At the end of a year that has been exceptional in many ways, "ambivalence" would probably be the term that best describes our feelings about 2010. Certainly our view of the future is strongly influenced by the experience of the past two years, which has raised numerous questions about how we measure and manage risk. Did the financial crisis reveal significant weaknesses in our ability to measure and manage risk? Or was it so exceptional that even an optimal approach to risk management could not have altered the plight of those financial service providers that suffered most during the crisis? These questions and many others formed the starting point for this issue of the PRiM Risk Newsletter, which is dedicated to the future of risk measurement.
For the keynote interview of this, our 20th, issue, we turned to academia and asked the opinion of three renowned experts in risk management: Professor Georges Hübner, Deloitte Professor of Financial Management at HEC Management School, University of Liège; Professor Philippe Jorion, Chancellor's Professor of Finance in the School of Business of the University of California at Irvine; Professor Christian Wolff, Director of the Luxembourg School of Finance. We are delighted to have such prestigious interviewees and hope that you are as stimulated as we were in reading what they have to say on this topic.
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2009-10-05 / PRiM Risk Newsletter No 19 - Pricing Risk
Pricing risk is not very problematic, if a fund is only pricing liquid securities that are listed on a major stock exchange in normal market conditions. Since the implementation of UCITS III, however, funds increasingly invest in financial instruments that are traded outside of exchanges (i.e., over the counter, OTC), which has resulted in higher levels of pricing risk. This trend appears to pose a significant challenge for fund managers, fund administrators and custodians, as well as for regulators. While the financial crisis has ruined the appetite of some fund managers and investors for exotic assets, others continue to search for new types of instruments, the risks of which may not be completely known. New instrument types or even known instruments that are not well defined or understood and illiquid assets (such as private equity or real estate) can lead to major issues in pricing. The question then arises, who accepts the responsibility for resolving such issues effectively?
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2009-07-20 / PRiM Risk Newsletter No 18 - Custody Risk
Fund custody in Luxembourg has traditionally been a relatively low-profile area. Until the last quarter of 2008, discussions in the Luxembourg fund industry mostly centred on topics in fund management or fund administration. But since the discovery of the worst fraud in the history of financial services, the “Madoff Affair”, both regulators and service providers are now focusing on fund custody as an area of paramount importance. What is the connection between the Madoff Affair and fund custody in Luxembourg? The fact that many European funds (including some Luxembourg funds) had invested with Madoff and suffered significant losses because of him has raised numerous questions regarding the responsibilities of European custodians in supervising fund investments. This issue of the PRiM Risk Newsletter, therefore, is dedicated to custody risk, particularly with regard to Luxembourg investment funds.
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2009-04-22 / PRiM Risk Newsletter No 17 - The Future of Regulation
One of the topics discussed most frequently during the last year has been the role of regulation and regulators in financial markets. While the traditional position of the U.S. government has been “free markets, free people”, i.e., the intervention of regulators should be kept to a minimum, European governments have pushed for stronger regulation, particularly with regard to hedge funds and other high-risk financial instruments.
The financial crisis and the entry of the new U.S. government have led to a significant shift in the international discussions about regulation, causing many of us to speculate on the direction of market regulation in the future. It is in this context that the present issue of the PRiM Risk Newsletter focuses on the future of regulation.
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2009-01-12 / PRiM Risk Newsletter No 16 - Initial Lessons from the Current Financial Crisis
That 2008 finished with one of the worst financial crises that the world has ever experienced is certainly well known. Both the popular and the financial press have revealed a myriad of problems that have been attributed rightfully or wrongly to the sub-prime crisis, the "greed" of some bankers, the demise of Lehman Brothers or the woes of other players in financial markets. But beyond the headlines of the press, practically every person who is active in financial services is probably asking himself the same questions: "How bad is it?" and "Where do we go from here?"
Although in the final analysis, each financial service provider must answer those questions for itself, it is crucial that all of us learn from this painful experience to ensure that a similar situation does not arise again. In this context, the PRiM Board of Directors decided to offer its views on the current financial crisis by dedicating the present issue of the PRiM Risk Newsletter to analysing certain aspects of the financial crisis that the world is now facing. The interview presented below focuses on key aspects of the crisis and attempts to identify some of the risk management lessons to be learned from them.
The purpose of highlighting these lessons is to stimulate readers to analyse the risk management in their own organisations and to consider possible improvements for the future. The opinions expressed below are not an official position of PRiM, its directors, its members or the companies, which employ them. By raising the issues, however, the PRiM Risk Newsletter aims at encouraging discussion and perhaps self-assessment among its readers.
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2008-10-06 / PRiM Risk Newsletter No 15 - Liquidity Risk
The 15th edition of the PRiM Risk Newsletter has been released, a week later than planned. That publication should be delayed due to the Risk Management association members having other matters of urgency to deal with just now is probably no surprise.
Never has risk management been more important and more visible than in the crisis that is currently threatening the very foundations of financial markets. While on the one hand this situation reinforces the need for effective risk management and validates the raison d’etre of PRiM and its work, it also highlights the complexities of managing risk. In a simple and transparent world, a naive observer would assume that the companies impacted most by the crisis are those that have (had) inadequate risk management. But in reality it is probable that Bear Stearns, Lehman Brothers, Washington Mutual and the other blue chip companies that have appeared in the press had excellent risk managers. So how can we possibly explain the bloodletting that the market is witnessing?
Certainly there is no simple explanation. The list of factors that have fuelled this crisis is indeed long and tangled. Liquidity risk, to which this issue of the PRiM Risk Newsletter is dedicated, has played a major role throughout the crisis.
Our December edition will seek to draw some immediate lessons from the events of recent weeks and months.
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2008-07-01 / PRiM Risk Newsletter No 14 - Information Risk
Recent incidents, such as the breach of banking secrecy in Liechtenstein and the accusations against Deutsche Telekom regarding data protection have led to an increased awareness of information risk. Although information risk is often associated with information technology (IT) risk, it encompasses many other aspects that are not directly related to IT. Issues such as the quality and accuracy of information content, the availability of the right information at the right time and the protection of sensitive information illustrate the vastness of information risk. For Luxembourg financial institutions with their significant roles in international financial markets and the strict banking secrecy laws that they must respect, the effective management of information risk is a conditio sine qua non.
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2008-03-31 / PRiM Risk Newsletter No 13 - Reputation Risk
The PRiM Risk Newsletter Number 13 is dedicated to reputation risk, a form of risk that is intangible and therefore very difficult to manage. Yet reputation risk has become a major concern of most companies, particularly financial service providers, whose success is highly dependent on reputations. Despite this growing concern, many companies do not have a specific strategy for managing reputation risk. It is likely that this situation derives from the abstract nature of reputation risk and our tendency to underestimate its importance.
But the articles and interviews in this issue of the Newsletter confirm the necessity for an active management of reputation risk. Even if a company assumes that its reputation is good, the way in which it is perceived by its clients, employees and suppliers may be completely different. How important is perception? Certainly in terms of reputation risk, perception is everything.
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2007-12-31 / PRiM Risk Newsletter No 12 - Investment Risk
To judge the potential impact of investment risk we need look no further than the sub-prime crisis, which continues to be a major topic of public discussion. Although investments linked to sub-prime loans have often been criticised, some of the most highly respected players in financial markets suffered significant losses because they may have underestimated this danger.
In Europe, investment risk is often discussed in the context of the increasingly aggressive investment strategies adopted by traditional investment funds. Not only the growing use of derivatives in the wake of UCITS III, but also the inclusion of structured products and other “new” types of instruments in traditional portfolios are indicative of investment risk in the European fund industry.
The PRiM Risk Newsletter Number 12 is therefore dedicated to investment risk.
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2007-10-01 / PRiM Risk Newsletter No 11 - Regulatory Risk
During the last ten years, financial service providers have found themselves overwhelmed by a steady flow of regulatory changes that ranges from the euro, Basel II, Sarbanes Oxley, the European Savings Directive and changes in prevention of money laundering legislation to MiFID. While few people would question the necessity of these changes, the risk that they represent is often underestimated. It is for this reason that we have dedicated this issue of the PRiM Risk Newsletter to regulatory risk, which in the present context can be defined as the risk that regulatory changes could have an adverse impact on financial service providers.
The consequences of regulatory risk can extend from large, unplanned expenditures required for implementing regulatory changes to penalties for not properly complying with them. In certain cases, a regulatory change could even require a company to change its business model. Many of these aspects and others are discussed in the articles and the interview in this issue of the PRiM Risk Newsletter.
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2007-06-07 / PRiM Risk Newsletter No 10 - Directorship Risk
This issue of the PRiM Risk Newsletter is being published earlier than the normal date to coincide with PRiM’s tenth anniversary, which will be celebrated on June 7. We congratulate all the members of PRiM and particularly its Board of Directors on ten years of success! May the next ten (or twenty) years be equally interesting and successful!
The board of directors of an investment fund has often been considered a group of figureheads, who only play a symbolic role in the success or failure of a fund. This attitude is rapidly changing with the regulatory environment in Europe and an increasing awareness among shareholders that voting rights mean influence, even in a fund. Sandwiched between these two forces, fund directors are now confronted with a wide range of risks that must be managed effectively. It is in this context that we are focusing on directorship risk in this issue of the PRiM Risk Newsletter. Included in directorship risk are all the risks that fund directors face in carrying out their responsibilities as respresentatives of the investors in a fund.
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2007-03-05 / PRiM Risk Newsletter No 9 - Microfinance
Microfinance has become a significant part of financial services. While traditionally microfinance was viewed as a means of providing poor families with very small loans (microcredit) to help them become self-sufficient, today it includes a wide range of financial services that aim to meet the needs of low-income individuals or groups for a variety of financial services.
Microfinance has become particularly important for Luxembourg, as witnessed by the number of microfinance investment funds, conferences and other activities that have appeared in the Grand Duchy during the last few years. Included among these activities is PRiM’s direct involvement in providing microfinance institutions (MFIs) with expertise on risk management.
Because of the growing interest in microfinance, this issue of the PRiM Risk Newsletter focuses on microfinance and risk.
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2007-01-03 / PRiM Risk Newsletter No 8 - People Risk
Although discussions on operational risk have become commonplace since the late 1990’s, the topic of people risk, which is actually a part of operational risk, has received relatively little attention. Far too often financial service providers assume that people risk is a human resource issue and therefore do not give it the risk management attention it deserves. For this reason, the eighth PRiM Risk Newsletter focuses on people risk.
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2006-10-01 / PRiM Risk Newsletter No 7 - UCITS III
For most of the European fund industry, the publication of the UCITS III Directive was a significant milestone that opened many opportunities. A wider range of activities for fund management companies, simplified prospectuses, new types of fund structures and a wider choice of asset types are some of the improvements that UCITS III introduced. The fund industry welcomed these changes with open arms.
Four years after the approval of UCITS III, however, the European fund industry is realising that change also engenders risk. This issue of the PRiM Risk Newsletter is thus dedicated to the new risks that have arisen with the implementation of UCITS III. Key among these risks is an increased use of derivatives in UCITS funds.
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2006-06-30 / PRiM Risk Newsletter No 6 - MiFID
If the number of regulatory changes that Europe has witnessed since the beginning of the new millennium is an indication of how quickly European markets are being transformed, then we can expect the European financial sector to be radically different by the end of the first decade of this century. The introduction of the euro (albeit starting in the last century), Basel II, UCITS III, as well as new accounting and reporting standards are only a few of the major changes that we have experienced in recent times. Closely following these changes is a new European directive that must be implemented by November 2007 – MiFID, The Markets in Financial Instruments Directive.
It appears that at present many financial service providers in Luxembourg are still uncertain about MiFID’s requirements and how they can be met. We therefore have dedicated this issue of the PRiM Risk Newsletter to MiFID.
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2006-03-30 / PRiM Risk Newsletter No 5 - IT Risk
Financial services today are to a large degree information services. Financial service providers that handle physical money and/or securities are the exception. In most cases they only process information, which represents money or financial instruments.
This situation implies a significant dependence on information technology (IT) and with it the associated IT risks.The omnipresence of IT in financial services is the justification for dedicating this issue of the PRiM Risk Newsletter to IT risk.
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2005-12-20 / PRiM Risk Newsletter No 4 - Investment Funds
As the second largest fund market in the world, Luxembourg is renowned for the quality of the fund administration and custody services delivered by its financial service providers. Managing the risks faced by investment funds, however, is a broad discipline that transcends the limits of national markets. In the fund world, risk management extends from the development of new products to operational risk in the transfer agency and beyond. This issue of the PRiM Risk Newsletter looks at a variety of risk issues in the investment fund sector.
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2005-03-01 / PRiM Risk Newsletter No 3 - Risk in Private Banking
Private banking is an area of financial services that is often underestimated, perhaps because of the discretion and tradition that are considered its hallmarks. Notwithstanding its focus on the traditional values of high-quality client service and trust, private banking has become increasingly modern in terms of both methods and technology.
Private banks today may still have a traditional façade of classic furniture and doormen in coat tails, but behind the scenes they employ sophisticated tools and methods for managing risk, designing portfolios and tracking client relationships.Because of private banking’s traditional focus on managing risk for its high net-worth private clients and recent developments in modernising private banking techniques, this issue of the PRiM Risk Newsletter is dedicated to risk in private banking.
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2004-05-25 / PRiM Risk Newsletter No 2 - Insurance Risk
An important issue that has emerged out of the discussions around the New Basel Accord is the use of insurance to mitigate risk. Although for many people insurance is an obvious risk mitigant (e.g., car insurance to mitigate the risk of an accident), the acceptability of insurance in mitigating operational risk is still a controversial subject in Basel. It is for this reason that we have targeted insurance as the central topic of this PRiM Risk Newsletter.
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2003-12-05 / PRiM Risk Newsletter No 1 - Launch Issue
More than ever before, financial service providers today are focusing their attention on risk management. Whether the reasons for this trend are the extensive discussions surrounding the New Basel Accord, recent financial scandals that receive more than ample media coverage or the current market situation in general, we need not look far for the justification to publish a newsletter dedicated to risk and risk management.
The PRiM Risk Newsletter, the first issue of which you are now reading, is completely dedicated to analysing and understanding risk in financial services. Its primary objective is to serve as a forum for the exchange of information on risk in financial services, both in Luxembourg and internationally. The contents of the Newsletter, therefore, will be provided primarily by practitioners from all areas of financial services, not just risk management.
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AGM - PRiM elects new president
