Flash: New Mandatory Compliance Requirement By SEC And FSA Effective Today

by Stephen McPhie, CA

Partner RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

 

The SEC in the U.S. and the UK Financial Services Authority today jointly issued an urgent advisory containing a new risk related compliance requirement that is effective immediately.

 

Essentially, for public and major private companies this involves an internal peer review of risk awareness by and of key personnel. This includes the five most senior executives and, rather incredibly, the five most junior staff in a company.  As there is no elaboration, we assume this even extends to the cleaners.  Apologies to cleaners, who are, by some measures, the most important people in a company, but in relation to risk compliance, have little involvement.  (Actually, perhaps they have!) The review involves completing a questionnaire surrounding risk awareness and is to provide an assessment by the five most junior staff, regarding the personal responsibilities of the risk capabilities and awareness of the five most senior company staff. Therefore, for example, the janitor is required to complete a questionnaire about the personal sanitary habits of the CEO.

 

We are not sure what the intended benefit is of such an exercise but it could be an attempt to gauge how well a risk culture has been instilled throughout an organisation.  Results are then to be posted on the company web sites.

 

OSFI, the Canadian financial institutions regulator, plans to implement the procedures at an indeterminate future date once they have a better understanding of the meaning of “risk awareness”.

 

Questionnaires must be submitted this morning, which is April 1^st.

RMBWA (Risk Management By Walking Around)

by Rick Nason, PhD

Partner RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

 

Had dinner last night with a junior trader.  Really bright guy.  Has a terrific future ahead of him.  Along with the usual conversation about sports, cigars and travel etc., we starting talking about work.  In a nutshell he laid out many of the issues that he observed in his workplace.  The conversation was nothing out of the usual, and exactly what you would expect when two guys get together for some brew and grub. 

Walking back to my hotel I started to think about how useful it would have been for senior risk managers to have listened in to our conversation.  This front line trader knew where all of the weak links in the system were, the daily struggles to deal with them, and had some great ideas of how the issues could be remedied.  

What my friend did not have a knowledge or an appreciation for is all of the political B.S. that the senior risk people have to put up with on a daily basis as they try to align the various functional units, each of which has a specific agenda (and a senior manager who has their own agenda that is likely disconnected from the front lines). 

When I was in B-School in the early 90’s, one of the key buzz-words was MBWA – management by walking around.  In other words, senior managers should keep a handle on the business by keeping in contact with the front lines. 

Dinner last time convinced me that it is time for risk managers to RMBWA.  

Car insurance. House insurance. Company survival insurance(?).

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

Recently RSD Solutions was in a discussion with individuals who encourage Canadian companies to export.  At the meeting we discussed the idea of hedging the US dollar relative to the Canadian dollar.  It was pointed out by our host that local firms and possibly many smaller Canadian firms do not hedge either currency or commodities because it is considered risky.  Of course there are other reasons – the idea is seen as intimidating to some senior managers because of its sophistication but we will save that for another blog.

I pointed out to our host that hedging is a form of insurance much like automobile or house insurance but in a company’s case it is helping ensure the firm's very survival.  When I pointed out that effectively what a CEO or CFO is saying by not hedging, is that buying insurance on their corporate survival is “risky”: an epiphany moment was reached in the room. 

So my question is, is hedging considered risky at your firm and what do you think would be a recommended strategy for turning this perception around?  

Basel III – it’s the denominator stupid!

by Stephen McPhie, CA

Partner RSD Solutios Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

 

 

Basel I was a laudable start at trying to set up some sort of level international playing field for banks.  However, it was far too simplistic, had too many gaps and was way behind the sophistication of major market participants.  Basel II was a major theoretical step forward in the concept of risk weighting assets.  However, as we have seen, risk adjusted assets were totally and widely misstated with the result that many large banks did not have the capital to support the risks they were taking.  Now Basel III focuses on vastly more capital.  Perhaps the underlying thinking is that if we cannot calculate the denominator properly, and creative geniuses might continue to find ever more ingenious ways to make pebbles look like diamonds, then jacking up the numerator should make us all feel better.

 

Higher capital can mean lower Return on Equity, but will that encourage investors to come up with all that extra capital?  Otherwise, higher capital means higher margins on loans and higher fees on other bank products.  How are you planning for such an eventuality which will affect most businesses and people personally?

Politicians Are Risk Managers

by Stephen McPhie CA

Partner RSD Solutions Inc

www.rsdsolutions.com

info@rsdsolutions.com

 

Tuesday and Wednesday of last week saw budgets delivered by the finance ministers of both Canada and the United Kingdom.  To be more accurate, the budget was delivered in Britain by the Chancellor of the Exchequer.  As an aside, the British Prime Minister also has another title which is First Lord of the Treasury.

Both finance ministers had different agendas.  In Canada, the trick was not to get blamed if the budget was defeated resulting in an election call (which is indeed what happened but on a different matter).  In Britain, it was an imperative not to force the Liberal Democrats to abandon the coalition government, thus causing an election.  In both cases political timing is all-important.

Actually, in the latter case, the hard work was already done late last year and this budget only really consisted of some tweaking.  However, in both cases, a major consideration was essentially hedging against external factors that could not be directly controlled but which could result in major adverse consequences, at least for the finance ministers concerned and their political parties.  Politicians are masters of this type of risk management - pursuing sub-optimal agendas and policies to manage a political outcome.  In other words, taxpayers and the country as a whole pay an option premium on behalf of politicians.

There are often a lot of things not to admire about politicians and their methods, but sometimes you can admire some of their risk management abilities.  Can many company executives say the same about how people would see their companies’ risk management capabilities?

Young Man. Old Man

by Rick Nason PhD, CFA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

“The young man knows the rules, but the old man knows the exceptions”

Oliver Wendell Holmes

 

If I have to explain the relevance of the above quote to risk, then you won’t get it.