Ahead of the 2nd annual Quant Risk Management 2015 Conference, the Center for Financial Professionals (CFP) conducted high quality primary research into the key challenges faced by Quantitative Risk managers and professionals. Please enjoy the research blog below and ensure you review the resulting agenda and speaker line-up at www.cfp-events.com/quantrisk
The role of the Quant Risk Professional has changed significantly over the past few years. Since the financial crisis, demands from regulators have significantly changed the systems, processes, methodologies and calculations in place as well as put a greater demand on the knowledge and experience base for quants.
Research recently undertaken by CFP with senior quants from European institutions looked into the challenges being faced by quantitative risk managers, specifically in the back and middle offices. Key challenges were highlighted, namely around the modelling side, but all challenges highlighted relate back to regulatory changes and impacts including the Fundamental Review of the Trading Book, Basel III and much more.
Enhanced regulator supervision on model risk, validation and governance was significantly raised as a key issue for 2015. Without clarity from the regulators, European institutions are following effective compliance procedures from the US regulators in the form of SR 11-7 and OCC 2011-12. These guidelines are generally being seen as the global standard to follow. However, key questions and interpretations can be drawn from these guidelines including what is or is not a model, what should be included in the model risk framework and how you can build an effective model risk governance framework. In addition, regulators are requiring institutions to quantify model risk and allocate a number to the risk that proves a greater challenge similar to those of operational risks.
Changes and clarity in the Counterparty Risk space are continuing to drive discussions. Around the initial and bi-lateral margin requirements, differences across geographical regions is causing haziness and institutions have a growing concern for different pricing across multiple CCPs and the fallout from using different margin requirements and a non-specific standard. In addition, the concerns of a CCP default and the risk of systemic risk spreading from this fallout continue to be a question on quants mind and in particular, how to model the institutions exposure.
Value Adjustments continue to be the ‘flavour of the month’ for quant risk professionals and in 2015, a specific interest on newer valuations in the form of MVA (Margin Value Adjustment) and KVA (Capital Value Adjustment) have taken centre stage. With these new adjustment requirements, institutions need to find effective and efficient methods for calculating and computing the numbers not just in theory but also in practice.
The largest change on the horizon for quant risk professionals continues to be the Fundamental Review of the Trading Book. Bringing significant changes, a lot has been clarified and confirmed but there is still much to come from the regulators and Basel Committee. Later this year, results and findings of the latest QIS will be released and institutions will hopefully be able to fully understand the impacts implementation will have on processes, methodologies, systems and capital floors. In the meantime, new liquidity horizons need to be modeled and calculated and gathering a capital figure that actually represents liquidity continues be a challenge for quants.
