Your Lifeline in a Risky World
CMRA provides independent risk advisory services to boards, financial institutions, asset managers and institutional investors facing complex market, valuation and governance challenges.
Our approach combines hands-on capital markets experience, quantitative analysis and practical governance expertise to identify risks that may be mispriced, misunderstood, mismanaged or unintended.
Effective risk management requires more than models.
Quantitative measures such as VaR, stress testing and scenario analysis are essential, but they are only one part of an effective risk-management framework.
CMRA evaluates how risk is identified, measured, governed, communicated and acted upon, including risks that cannot be fully captured by quantitative models.
Our approach is informed by decades of experience across trading, portfolio management, valuation, governance, market crises and complex financial disputes.
The objective is not simply to measure risk, but to understand where it originates, how it may change under stress and whether the organization is prepared to respond.
CMRA works with boards, senior management and investment professionals across the full risk-management lifecycle — from measurement and governance to valuation, due diligence, controls and response to emerging risks.
CMRA evaluates the design, implementation and interpretation of risk measures including VaR, stress testing, scenario analysis, Key Risk Indicators and integrated risk reporting.
Our focus is not simply on producing risk metrics, but on providing the context necessary to understand their assumptions, limitations and implications for portfolios and institutions.
Effective risk management depends on how responsibility, oversight and escalation operate across the enterprise. CMRA assesses governance structures, the role and independence of the risk function, CRO responsibilities and the relationship between risk management, senior management and the board.
Our perspective reflects experience as directors, trustees, risk managers and business leaders, as well as extensive benchmarking of governance practices across financial institutions.
CMRA helps organizations translate risk strategy into clear Risk Appetite Statements, policies, limits and escalation frameworks that can be understood and implemented throughout the organization.
Our work also considers risk culture and incentives, including whether compensation structures and business objectives are appropriately aligned with the institution’s stated risk appetite.
CMRA independently reviews valuation methodologies, risk models, model inputs and assumptions with particular attention to the limitations that may become material under changing or stressed market conditions.
Our approach goes beyond the mathematics to consider input controls, assumption validation, governance and whether model outputs can be translated into actionable decisions.
CMRA advises on counterparty exposure, collateral management, margin, funding and liquidity risk across portfolios and complex financial transactions.
We consider both normal-market conditions and the potential consequences of stressed liquidity, changing collateral values, concentrated exposures and deterioration in counterparty credit.
CMRA evaluates operational controls, business processes, marking practices and new-product governance with particular attention to risks that may fall outside standard quantitative risk frameworks.
For institutions entering new markets or launching new products, we help identify market, business, operational, regulatory and litigation risks before they become embedded in the business.
CMRA conducts independent operational and risk due diligence on investment managers, transactions, portfolios and strategic opportunities, drawing on direct experience across financial markets and complex investment strategies.
Our work combines quantitative analysis with qualitative assessment of governance, controls, valuation, strategy, documentation and organizational practices.
CMRA provides independent advice and education to boards and senior management on risk governance, risk measurement, market developments, emerging risks and the effectiveness of management reporting.
We also help translate complex risk information into language that is meaningful at the Board and CEO level and advise institutions on how risk capabilities and risk culture are communicated internally and externally.
CMRA’s advisory work spans risk measurement, governance, valuation, due diligence, controls and board-level oversight across a wide range of financial institutions and investment organizations.
Reviewed and benchmarked enterprise risk-management frameworks, governance structures, escalation processes and the effectiveness of independent risk oversight.
Developed and reviewed Risk Appetite Statements, risk policies, limits and escalation frameworks for financial institutions, insurers and institutional investors.
Assessed stress-testing methodologies, scenario analysis, VaR implementation, risk reporting and the limitations of quantitative risk measures under changing market conditions.
Independently reviewed pricing methodologies, valuation policies, model assumptions, market inputs and governance for complex financial instruments and portfolios.
Conducted operational and risk due diligence on hedge funds, asset managers, investment strategies, transactions and financial-services acquisitions.
Evaluated counterparty exposures, collateral practices, margin requirements, liquidity vulnerabilities and funding risks across complex portfolios and transactions.
Assessed market, operational, regulatory and litigation risks associated with new financial products, trading strategies and entry into new markets.
Advised boards and senior management on risk governance, reporting, market developments, emerging risks and the effectiveness of communication between management and the board.
Reviewed the alignment of compensation, business incentives, risk-taking behavior and stated risk appetite within financial institutions.
Diagnosed weaknesses in risk-management frameworks and advised institutions on remediation following significant financial, operational or governance failures.
Many of CMRA’s advisory engagements are confidential. The examples above illustrate the range of risk-management issues on which CMRA has advised institutions, boards and investors.
CMRA’s risk advisory work spans complex financial instruments, trading strategies and asset classes across global capital markets. Our experience allows us to assess risk in the context of both the underlying product and the broader portfolio or institution.
CMRA helps Institutional Investors strengthen due diligence through tailored review frameworks, independent assessments and practical training grounded in firsthand capital markets experience. We also assist hedge fund managers in preparing for in-depth risk due diligence.
Design and develop due diligence questionnaires and review frameworks tailored to investment strategies, organizations and risk profiles, with a focus on identifying material investment, operational, governance and risk-management issues.
CMRA has conducted due diligence on multiple alternative investment managers, assessing investment strategies, operations, governance, controls and risk-management practices.
We have also conducted due diligence in connection with M&A opportunities, including stand-alone derivatives businesses, retail options trading software and an alternative energy trading firm, among others.
CMRA has also served as a consulting expert on market practice relating to due diligence for total return swaps referencing hedge fund returns.
Train Institutional Investors in effective due diligence, including how to ask more targeted questions, evaluate manager responses and identify weaknesses in investment, operational, governance and risk-management practices.
CMRA advises boards, financial institutions and investment
organizations across a broad range of risk-management, governance,
valuation and due-diligence matters.
Who We Advise
Banks & Broker-Dealers
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Risk management, governance, valuation, capital-markets strategy,
model review and independent risk diagnosis.
Asset Managers
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Risk governance, risk measurement, valuation, due diligence,
investment operations and new-product risk assessment.
Institutional Investors
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Risk budgeting, investment policy, governance, manager due
diligence, portfolio risk and board oversight.
Insurance Companies
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Investment risk, governance, risk measurement, portfolio
oversight, strategic analysis and board advisory.
Hedge Funds & Alternative Managers
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Risk management, VaR, valuation, due diligence, leverage,
margin, liquidity and complex trading strategies.
Law Firms & Legal Departments
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Independent financial analysis for disputes, investigations,
pre-litigation matters and complex market-practice issues.
Value-at-Risk: A Dissenting Opinion, by Stephen Rahl
“I foresee a day . . . when risk unit allocation surpasses asset allocation as a way to decide where to place investments”
The liquidity crunch brought home to many investors, portfolio managers, service providers and prime brokers how sharply valuations can diverge when a portfolio becomes unexpectedly illiquid...
"I was a diehard advocate for mark-to-market, and I still believe it's the lesser of evils, but there are times when model-based pricing might make sense," said Ms. Rahl. This would of course imply that the model-based methodology was favored over mark-to-market because either market prices were stale or unavailable, or the relationship between the underlying and the proxy was weak. "The option of using such a valuation methodology would require strict checks and balances within a fund," she said.
"Marks on the collateral don't necessarily represent the price at which a trade can be unwound," said Ms. Rahl. "In some situations we have seen the exact same trades with two different counterparties being unwound at vastly different prices."
- Hedgeworld (July 2008)
Leslie Rahl says "People put too much emphasis on asset diversification and not enough on diversifying the more subtle risk factors such sensitivities to volatility, to flights to quality, to credit, etc."
- CFA Magazine (July/August 2008)
...Clearly the interests of the solvent and bankrupt parties are opposite when it comes to valuing contracts for early termination, and not surprisingly it can become contentious. Leslie Rahl, president and founder of Capital Market Risk Advisors, a risk consultancy, said that "there's almost always a difference of opinion, breakage between the value that someone thinks they're going to receive and what they do [receive]. Even if you have two [originally] matched trades you're going to take them off at different prices." In other words, what looked like two sets of perfectly offsetting positions-a perfect hedge-may turn out not to offset once quotes have been obtained and the contracts terminated.
While the quote method would seem to be objective, depending on the liquidity of the market the results can still be dubious. "I've seen bunched quotes, three bunched together at one end, and two at the other, as though there's a significant difference of opinion among dealers." As a result, even after dropping the outliers, "you can still get a mishmash," Ms. Rahl said...
- Journal of Global Financial Markets (Spring 2002)
...Rahl began by presenting a long list of the risks facing financial companies, one that has been growing over time (see Galaxy of Risks). She used the analogy of an iceberg to illustrate the key issue faced by risk managers contemplating such a list of risks: everyone understands the existence of the iceberg, but no one knows what it looks like under the water.
Rahl pointed out that the analytical components of risk management - value at risk, stress testing, backtesting, model review, and limits - are all important.
More generally, Rahl argued that models will never capture the full "galaxy of risks." Things tend to go wrong, she warned, when people begin to believe the numbers. Clever forms of fraud, new market moves, acts of God, and regulatory surprises - to name a few - always threaten to overwhelm a models assumptions...
Rahl also cautioned against using value at risk as a worst-case scenario...
- Federal Reserve Bank of New York Economic Policy Review (January 2000)
The widely respected risk consultants, Capital Market Risk Advisors (CMRA) in New York even went so far as to label 1997 the "year of model losses". The firm attributes losses of $2.7 billion or 40% of all derivatives losses for the year to models.
- Risk.net (September 1998)
Leslie Rahl: I agree completely with the comments on the importance of stress-testing, but I guess I would go one step further. I think people are really making a mistake in not also stress-tesing their VaR models. Many people found out that their exposures with many counterparties were multiples of what the credit department thought they should be. Unfortunately, most stress-testing has been done in the market risk arena, rather than applied to the potential credit exposure. I would contend that the models aren’t nearly as bad as they might be portrayed, but that the assumptions being put into the models as well as the stress-testing of those assumptions have not received enough attention.
- Derivatives Strategy (December 1998)
Capital Market Risk Advisors, warns that risk models based on historical default data could prove invalid for credit derivatives linked to syndicated loans
- BusinessWeek (July 1997)
Most derivative houses now provision for credit risk. But very few do so for liquidity. Leslie Rahl thinks the liquidity of underlying markets, or the lack of it, will be of increasing concern, forcing houses to provision accordingly. "In the same way people set aside reserves depending on the credit of the counterparty, I think you're going to have people set aside for liquidity. The reserve you'd set aside for a three-year US dollar interest rate swap would be quite different from CTE [Ecu Italian government bond] swaption" . . . A clearing house for OTC products could be one alternative: "I could easily envisage a clearing house in which, once a deal is done, a central margining credit-enhancement vehicle takes over."
- Risk.net (December 1992)
When an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. "You can't rely on VaR as your only metric," says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. "We recommend people use three to five different metrics. It's like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things." ...
Rahl recommends applying stress tests to see how a portfolio would react to sharp drops, market shifts, unusual situations or changes in underlying assumptions. Stress-testing models, which are included in risk systems, can reveal weaknesses that a simple VaR test misses. But Rahl says too many financial firms continue to rely mostly on VaR. Back in April 2000, Rahl's firm conducted a survey of risk practices and found that 45 percent of financial firms, including hedge funds, were not using stress tests at all. Although she hasn't updated the survey, she says she has noticed only a slight improvement since then.
"In risk management only about a third is quantitative," Rahl says. "A third is still a big part of the puzzle, so it is quite valuable." The remaining two thirds of the puzzle is where good risk managers earn their money. Ultimately, an accurate forecast depends on knowledge, experience and chutzpah.
- Alpha (June 2008)
Last month, New York-based consultancy Capital Market Risk Advisors released a survey on economic capital allocation. It reported the economic capital allocated by large global banks to operational and other risks (but not market risk or credit risk) ranged between 5% and 60%.
- Risk.net (June 2001)
A recent survey of financial institutions has found that most are concerned with credit risk but are not accounting for liquidity risk...Many of the firms are also not applying risk-adjusted methods to allow for a more efficient distribution of capital...the survey [ Economic Capital Survey 05/01 ] which was conducted by Capital Market Risk Advisors..."It's purely based on attitude whether they use the risk-adjusted return method or not," says Leslie Rahl, president of CMRA
- Risk.net (June 2001)
Leslie Rahl, president of Capital Market Risk Advisors in New York, told the group that too many people are becoming mesmerized with value-at-risk (VaR) and other quantitative techniques. Rahl agrees that these tools are valuable. But she thinks that we will look back on them 10 years from now with the same amusement which "state-of-the-art" approaches from the 1980s now inspire. Rahl pointed out that the quantitative part of risk management represents only about one third of a comprehensive risk management programme. "Senior managers - with practical wisdom -definitely need to get involved in helping to set the assumptions behind some of these complex models," she said.
- Euromoney (November 1999)
According to CMRA's Rahl, plan sponsors should be aware of violations of investment guidelines. One common problem is an outside manager who fails to report losses. Says Rahl, "Investment guidelines are often unmonitored by compliance staff and managers override limits." How many trades should be monitored? "That depends. You could monitor every trade if you had the resources. What's more important is to remember the 80/20 rule: 80% of the risks probably come from 20% of the trading. High volume, standardized transactions don't cause operational risk; it's transactions outside the system, the low volume, high impact trades that you should watch."
- Alert Investment Risk (November 1999)
In response to the proposition for a clearinghouse that matches trades and guarantees that all contracts are honored, "It's been talked about for a long time. " But the idea, she adds, "hasn't gone anywhere because of dealer resistance -- the costs and the complexities in agreeing on what something can be valued at." - Leslie Rahl on Regulating Derivatives
- Derivatives Strategy (December 1998)
VaR does not demonstrate the worst-case scenario
- Derivatives Week (January 1997)
VaR models contain inherent flaws. The biggest glitches surface on days when markets break free of normal patterns, smashing the neatly calibrated VaR volatility and correlation barriers. In recent months convulsions have racked both the CMO and structured-note markets, says Leslie Rahl, a risk consultant and a partner at Capital Market Risk Advisors: "During those market dislocations, the models Wall Street ran couldn't get a fix on what the value of the position was, let alone how much the value at risk was."
- Institutional Investor (February 1995)
