Wed, Jul 1, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

CMRA and IAFE survey finds that 41.1% of respondents do not escalate model errors

Thursday, April 21, 2011

Peter Niculescu
Opalesque Industry Update - In the wake of the AXA Rosenberg/SEC Model Risk settlement, Capital Market Risk Advisors (CMRA), a pre-eminent risk advisory and litigation support boutique for the past 20 years and the International Association of Financial Engineers (IAFE), a not-for-profit, professional society dedicated to fostering the profession of quantitative finance today released the results of a benchmarking survey of market practice concerning model risk.

“The SEC settlement may foreshadow new rules governing model disclosure and oversight not only for quant funds but for banks, insurance companies, asset managers and Institutional Investors,” said Peter Niculescu, CMRA Partner and former Head of Fixed Income Research at Goldman Sachs and former Head of Capital Markets at Fannie Mae.

The survey of financial institutions including banks, asset managers, insurance companies, and institutional investors found that:

  • 41.1% of respondents do not escalate model errors
  • 42.0% of respondents were surprised by the SEC’s concern with models not related to financial reporting or disclosure and/or by the implication that model errors should be disclosed to the investors
  • Among respondents where “models drive business”, only 33.3% were comfortable that they were in full compliance with the SEC’s expectations
  • Among Institutional Investor respondents, only 47.7% currently include a discussion of risk governance of models as part of their due diligence process
  • 66.2% of respondents have a model review policy but only 49.4% of respondents have error disclosure policies
  • Only 48.5 % of respondents have an independent quality control
  • 28.1% of respondents don’t have a policy for spreadsheets or 3rd party vendors
  • 28.6% of respondents indicated that model reviews were conducted by the model developer rather than independently
  • When presented with a list of 13 model “changes”, the participants disagreed as to which were “errors” and which were “enhancements”, there is not a clear consensus on when a “change” or an “enhancement” becomes an “error”
  • 36.4% of respondents whose businesses are “model driven” plan to expand their model review process

“One possible result of the SEC settlement could be the application of much greater review and oversight requirements on investment and hedging models as well as on spreadsheets,” said Richard Lindsey, Chair of the IAFE and former Director of Market Research for the SEC.

More detailed results have been sent to participants and will be discussed at the IAFE Annual Conference on May 16th-17th.

(press release)

About Capital Market Risk Advisors
Capital Market Risk Advisors (CMRA) is a pre-eminent risk advisory, risk governance, expert witness, and litigation support boutique. Founded in 1991, we offer clients a unique perspective based on Founder Leslie Rahl, Partner Peter Niculescu, and CMRA's Managing Directors Dave Tyson, Frank Iacono, and Richard Horwitz's years of hands-on experience in the evolution of derivatives, risk management, hedge funds, risk governance, structured securities and other complex financial instruments and capital markets issues. For more information please go to www.cmra.com

- FG

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: New systematic strategy managed alongside research firm outperforms S&P500[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: An emerging CTA manager explains how he runs his strategy, which is based on an index produced by a research firm. Peter Turk is head of

  2. Larry Robbins' hedge fund Glenview buys 1m Tenet Healthcare shares[more]

    Komfie Manalo, Opalesque Asia: Glenview Capital Management said it bought an additional 979,482 shares at Tenet Healthcare Corp valued at $53.80 million, raising its stakes in the healthcare services company to 15.16%, reported

  3. Hedge funds panic over Greece[more]

    Komfie Manalo, Opalesque Asia: Some investors are in panic mode as Greek Prime Minister Alexis Tsipras announced Sunday night that the banks and the stock market would be closed Monday, said

  4. Alternative investment industry could grow to $13.6tln in five years[more]

    Komfie Manalo, Opalesque Asia: Leading auditing and advisory group PwC said that the global alternative investment industry, which includes hedge funds, private equity and real assets, is set to increase to $13.6tln within the next five years. "Be

  5. Qbasis gets $200m-plus investment in 'black swan' hedge fund[more]

    From Reuters.com: A hedge fund that more than doubled clients' money during the 2008 financial crisis has attracted more than $200 million from an investor aiming to cash in on fresh ructions in global markets. Qbasis Invest has secured the investment from Britain's Omada Capital, Florian Wagner, wh

 

banner