Tue, Dec 1, 2015
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. David Einhorn's hedge fund plunged 5.2% in November, set for 2015 loss[more]

    From Bloomberg.com: David Einhorn’s main hedge fund at Greenlight Capital fell 5.2 percent in November and is poised for only its second losing year in almost two decades. The losses bring the fund’s yearly drop to almost 21 percent, according to an e-mail sent to clients that was obtained by Bloomb

  2. People - Solus Alternative Asset Management adds chief strategist from BTIG[more]

    From PIonline.com: Daniel Greenhaus joined hedge fund manager Solus Alternative Asset Management as managing director and chief strategist. He will work closely with Chris Bondy, Solus’ chief economist, managing director and executive vice president, said Chris Pucillo, CEO and chief investmen

  3. Commodities - Stung by oil, distressed-debt traders see worst losses since '08[more]

    From Bloomberg.com: It’s mid-November, but for investors who trade in the debt of distressed companies, the year’s already done -- and they lost. Hedge funds that specialize in the debt are grappling with their worst declines in seven years. Funds managed by Knighthead Capital Management, Candlewood

  4. Regulatory - Major changes in partnership audit procedures contained in 2015 Budget Act[more]

    Contained in the Bipartisan Budget Act of 2015, signed by President Obama on November 2, is a rather complex provision that materially changes how partnerships are audited. Generally effective for tax years beginning after December 31, 2017, the so-called “TEFRA” and “Electing Large Partnership” rul

  5. Following review Yuan included in reserve currency basket[more]

    Bailey McCann, Opalesque New York: The International Monetary Fund has confirmed the inclusion of the Chinese Yuan in the reserve currency basket. This means that loans will be available in Yuan alongside other major currencies including the US Dollar and the Euro. The basket of reserve curr