Mar 6, 2013

The Evolution of the Risk Manager - Insights from the GARP Convention and the Risk Landscape in the Nordics

Johan Stromberg Regional Sales Manager Nordics at Numerix joins host and CMO Jim Jockle to recap the 14th Annual GARP Annual Risk Management Convention held in New York City on March 12-13. Johan discusses key regulatory themes impacting today’s global capital markets and the changing role of today’s Risk manager; in addition to the increased focus on Counterparty Credit Risk and the complexity of CVA implementation. In conclusion, Johan expands upon the emergent derivatives landscape in the Nordics region – exploring how banks are managing CVA and leveraging model validation functionality to support regulatory requirements.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section below.

Video Transcript: The Evolution of the Risk Manager - Insights from the GARP Convention and the Risk Landscape in the Nordics

Jockle: Hi Welcome to Numerix Video Blog, I'm your Host Jim Jockle and joining me today from Sweden Johan Stromberg. Welcome.

Johan Stromberg (Guest): Thank you.  

Jockle: Johan heads up the Numerix Swedish Operations, servicing the Nordics and is also Head of the Swedish chapter of GARP, and you’re here with us this week here in New York City for the annual Global GARP Conference. Tell us thematically what have you been hearing over the last few days. 

Stromberg: Well this is a big conference in New York so Risk Managers from all over the world are coming and joining, talking about next challenges or the current challenges for risk management, what we’ve been talking a lot about is regulatory challenges and it’s not going to disappear, it’s not going to be less, it’s going to be more. That’s the big theme I would say.  That refers to what we do in the complex derivatives space and how we can help the customers.

Jockle: This morning Denny Yu did a breakfast briefing around the concepts of profitability and OTC derivatives and managing, and one of the elements that he suggested was the risk manager of tomorrow is perhaps a different skillset than a risk manager today. Tell us a little bit about how the role within an institution is changing and how GARP is supporting the evolution of the skillsets of the individuals in risk.

Stromberg: There are many different challenges right now. What Denny was talking about was calculating counterparty risk that it has become much more complex, even pricing simple derivative trades, when you take into account the counterparty risk it becomes very complex. A risk manager of today, and of tomorrow will have to have a more quantitative skillset, it might be that you have to hire more quantitative risk managers to do the job. That’s one part of it, but you also see IT changes, so that’s one of the risk challenges of tomorrow is handling cyber-attacks, handling the risk, if the mailbox of your CEO gets into the wrong hands, what happens then, so it’s very complex, I think also a company like Numerix, we do very well in our space and we can contribute in our space, and we also have to be humble and understand that the risk manager, the CRO of today has a lot of different things to think about and it’s operational risk, and it’s credit risk, and it’s IT security and it is a big plate.

Jockle: So more importantly everything coming together and having that single view of risk in terms of rather or not running around and trying to go to forty different people putting it all together is really kind of critical to empower the risk manager of the future.

Stromberg: Definitely.

Jockle: So one of the other ones, while I have you here in New York City, want to talk about, is really the Nordics have been an explosive growth over the past few years as it relates to OTC derivatives, and clearly impacted by regulation but in many ways, the banks themselves have become safe havens for a lot of other EMEA countries, tell us a little bit about that growth that you’re experiencing and some of the trends in terms of what we can expect over the next 6 to 18 months in OTC.

Stromberg: So what we’re having in the Nordics, it’s like you say it’s fairly stable, we’re doing relatively well in Europe and in the world, which means that the banks have a unique position to take market share, to expand their business, it’s becoming a lot more complex, more costly to manage the derivative books, so you will need tools to be able to calculate the profitability of the trades of your business, so you we’ll see some business’ shut down, that has happened in the Nordics, some proprietor trading, has been shut down, CVA desks are popping up, so what we see and what the challenge and opportunity for the Nordic banks, is to take the opportunity that you have that’s relatively stable market, you make your profits, and if you make the right investments, you can actually gain market share in Europe and the rest of the world, and if you come back to CVA calculations, if you can have a CVA desk that can trade and know that you’re profitable, and can calculate that fast, so you win more requests for quotes, that’s a good opportunity for Nordic banks.

Jockle: Another thing which I know you and I have talked about over the past year has also been around model validation and the infrastructures that are being put in place. Perhaps you could tell us a bit more about why is model validation so important right now with the Nordic banks?

Stromberg: Well first of all, to me its regulatory requirements. Once again, you have to prove that your models are valid, that you don’t have model risk in the bank so you seek to reduce that. You have several front office systems, you try to price, you try to manage risks, but you have different models and different systems doing the same calculations and you can’t really be sure if you are actually hedging your risks, so yes that’s why it’s becoming more important.

Jockle: So Johan thank you so much for the quick update on GARP and on the Nordics and I hope you’ll join us again, and please feel free to reach out, especially if you are in the Nordics region about GARP and the events that are being brought to market in the local chapters and connect with Johan on LinkedIn, I know you are pretty active out there in terms of keeping individuals up to date on different issues. And again please always join the conversation, follow us on Twitter @nxanalytics or on our blog, we want to hear from you, we want to hear the topics, and talk about the things that you want to hear about. Thank you very much and have a good day.

Stromberg: Thanks.

Blog Post - Nov 07, 2011

Modeling Wrong Way Risk in CVA for Traders and Risk Managers

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