Tue, Feb 9, 2016
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. Investing - Avenue Capital's Marc Lasry: We like European bank loans, Comment: A bunch of hedge fund managers are chasing the 'dream of crushing a major structural problem'[more]

    Avenue Capital's Marc Lasry: We like European bank loans From CNBC.com: European banks are under immense pressure, but at least one prominent hedge fund has found what it thinks is a good opportunity in the wreckage. Marc Lasry, co-founder and chief executive of hedge fund Avenue Capital

  2. Credit Suisse cherry picks hedge fund ideas[more]

    From FT.com: Credit Suisse Asset Management plans to cherry pick profitable concepts from hedge funds with the launch in Europe of a “best ideas” strategy. The investment arm of the Swiss bank said the strategy will separate it from other funds blighted by “overcrowding problems”. It comes at a time

  3. Investing - Hedge funds bet on risks in U.S. blue-chip debt, Hedge funds bets against bank credit risk paying off, Tiger Global still likes Internet names, gets pointers from Jeter[more]

    Hedge funds bet on risks in U.S. blue-chip debt From WSJ.com: Hedge funds are betting the next bond sector to crack will be the $4.5 trillion market for the safest U.S. corporate debt. New York’s Perry Capital has placed a $1 billion wager against investment-grade bonds issued by 10 comp

  4. Short Selling - Hedge fund manager Kyle Bass is shorting real estate—again, Top US hedge fund has €80m short position in Paddy Power Betfair[more]

    Hedge fund manager Kyle Bass is shorting real estate—again From Fortune.com: He also predicted the mortgage crisis in 2008. Hedge fund manager Kyle Bass, who runs Dallas-based Hayman Capital, tanked the stock of a little-known real estate financier Friday by revealing that he is shorting

  5. HFRU Hedge Fund Composite Index down -2.58% in January[more]

    Global financial markets posted sharp losses in January led by declines in Oil and global equities, though steep intra-month losses in both were narrowed by strong gains in final trading days of the month. Global equities posted steep declines for the month led by Biotechnology, Energy, Financial, E