教學卓越計劃講義 風險管(研究所)Chapter 27 Firm-Wide Risk ManagementIntegrated Risk Management?Integrated risk management ?Provides a consistent and global picture of risk across the whole institution?Types of financial risk?Market risk?Liquidity risk?Asset liquidity risk?Funding liquidity risk?Credit Risk?Operational Risk2007/7/42教學卓越計畫專用講義Risk Interactions & Three-Pillar Framework?Wrong-way trades?Those where the market risk amplifies credit risk?Example: LTCM?Three-pillar framewok?Best-practice policies?Best-practice methodologies?Best-practice infrastructure2007/7/43教學卓越計畫專用講義Organizational Structure?Old Style Organizational StructureTop ManagementCEO/CFOTreasury & Trading“Front Desk”PositioningMarket riskCreditCredit riskLine ManagementBusiness StrategyProduct mgt. OperationsAuditInternal & ExternalReviews all areas2007/7/44教學卓越計畫專用講義Organizational Structure?Modern Organizational StructureTop ManagementCEO/CFOTreasury & Trading“Front Desk”PositioningRisk Management“Middle office” Market, credit, and operational risk Data capture DocumentationOperations “Back office” Trade Processing Cash mgt.AuditInternal & ExternalReviews all areas2007/7/4教學卓越計畫專用講義Organizational Structure?Risk management Organizational StructureRisk ManagementEVPMarket riskTrading roomCredit Risk Trading and banking booksOperational RiskRisk MISAnalyticsRAROC2007/7/4教學卓越計畫專用講義2007/7/4教學卓越計畫專用講義7Controlling Traders?Trader compensations (controls)?Modifying the structure of the compensation contract to better align interest of trader and company?Subtracting a risk-based capital charge from trading profits, as in RAROC?Appointing an independent risk manager?Trader Limits?Stop-loss limits restriction on traders imposed after a trader has accumulated losses?Exposure limits systematically imposed on traders as means to control losses before they occur?VAR limits account for diversification and time variation in risk教學卓越計劃講義 風險管(研究所)Chapter 28 Legal IssuesSources of Legal Risks?A failure in contracting?When a contract is not properly authorized or executed?A failure in contract documentation?Mistakes can arise in contract documentation such as incorrect number entries?Bankruptcy risks?Bankruptcy court could “cherry pick” the contracts, or choose to honor the contracts having the greatest value for the defaulting party only, to the detriment of counterparties?Changes in Laws and regualtaions?Contracts may contain clauses protecting, for instance, one party against changes in tax or regulatory treatments.?Gross-up clasue pay investor additional money to make up for the new tax2007/7/49教學卓越計畫專用講義Netting?Purpose?To offset transactions between two parties, with settlement of the net difference in cash flows across all contracts covered by a netting arrangement?Netting under the Basel Accord?Novation?Substitutes outstanding debt payments for new ones that provide for net payment obligations?Close-out netting agreement?A bilateral contract specifying that upon default, the non- defaulting party nets gains and losses with the defaulting counterparty to a single payment for all covered transactions2007/7/410教學卓越計畫專用講義Walk-Away Clauses?Limited two-way payment provisions?Allows both party to walk away from the contract in case of default?Full two-way payment provisions?Provides for full payment to the counterparty, subject to a bankruptcy distribution rule2007/7/411教學卓越計畫專用講義ISDA Master Netting Agreement?Master netting agreement?Establishes a template for a standardized contract, which is supplemented by a schedule to the mast agreement and the actual confirmation of contract?Provisions?A list of obligations?Detailing the mechanics of payment conditions?A list of credit provisions?Describe events of default and termination, early termination, and credit support provisions?A list of contractual boilerplate statements?Including representations, agreements, transfer provisions, governing law, and so on.2007/7/412教學卓越計畫專用講義The 2002 Sarbanes-Oxley Act2007/7/4教學卓越計畫專用講義13?Passed in the wake of Enron, WorldCom, and global crossing?Attempted to restore investor confidence in public corporations by improving corporate governance and control?Key Provisions?Creation of a new regulator?Certification by CEOs and CFOs?Ban on non-audit consulting services?Independence of audit committee教學卓越計劃講義 風險管(研究所)Chapter 29 Accounting and Tax IssuesInternal Reporting?Purpose?To measure the raw performance of various business units.?Ideally, the accounting treatment of transactions and position s should reflect their economic substance?Comparison of methods?Historical cost method using original price with adjustments?Mark-to-market method amount an asset could be bought or sold in a current transaction between two willing parties?Cash method recognizes profits and losses when the actual cash flow occurs?Accrual method recognizes revenues when earned and expenses when incurred.2007/7/415教學卓越計畫專用講義Major issues in reportin