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Peter Niculescu

“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