The Risk Standards Working Group

Risk Standards for Institutional Investment Managers
and Institutional Investors

 
Download the Risk Standards - Full Report (PDF - registered users)

Press Release

RISK STANDARDS FOR
INSTITUTIONAL INVESTMENT MANAGERS
AND INSTITUTIONAL INVESTORS
 
The Working Group

Suzanne Brenner, Associate Director of Investments, The Rockefeller Foundation
Kevin Byrne, Vice President & Treasurer, The Equitable Companies Inc.
Christopher J. Campisano, CFA, Manager, Trust Investments, Xerox Corporation
Mary Cottrill, Principal Investment Officer, CalPERS
Michael deMarco, Director, Risk Management , GTE Investment Management Corp.
Jon Lukomnik, Deputy Comptroller for Pensions, City of New York, Office of the Comptroller
Richard Rose, Chief Investment Officer , San Diego County Employees' Retirement Association
David Russ, Director, Investment Management, Pacific Telesis Group
James D. Seymour, Vice President, The Common Fund
Kathy Wassmann, Manager, Trust Investments, R.R. Donnelley & Sons Co.
Gregory T. Williamson, Investment Manager, Amoco Corporation

Technical Advisors & Coordinators

Capital Market Risk Advisors, Inc.

For Immediate Release: November 12, 1996

The Risk Standards Working Group announced today the release of the first comprehensive Risk Standards for Institutional Investment Managers and Institutional Investors (see Summary). The 20 Standards evolved over the past six months and reflect the comments and insights of senior managers from over 70 entities-institutional investors of all stripes, as well as money managers, broker-dealers, regulators, academics, consultants, custodians and officers of financial exchanges. Although various financial industry groups have published useful guidelines for derivatives in the past, this is the first document to address the broad range of risk issues specific to the fiduciaries and managers of multi-asset class, multi-manager portfolios.

The Working Group was formed in April, 1996 and distributed 33 Draft Risk Standards to a Comment Group in July. While all 33 concepts remain, detailed and incisive remarks from the Comment Group provided the basis for a consolidation into the final grouping of 20 Standards. The resulting framework may be used by institutional investors and institutional investment managers to plan their own risk measurement and risk management practices. While few, if any, institutions comply with all of the Standards today, the Working Group believes the Standards provide a solid foundation for institutional investors, as well as for their internal and external managers, to update and apply risk management policies, practices and procedures in an evolving investment industry.

The Risk Standards are grouped into three categories: Management, Measurement and Oversight. Risk Standards grouped under Management include careful identification and understanding of risks, clear definition and acknowledgment of responsibilities and development and exercise of risk containment procedures with built-in protections against error or abuse. The next group of Standards focuses on Measurement of risk in a timely, consistent manner while warning fiduciaries to be aware of the limitations of quantitative measures. The final set of Standards reviews the careful Oversight crucial to any investment program.

Seminars to present the Risk Standards will take place in San Francisco (November 25), Los Angeles (November 26), Chicago (December 10), and New York (December 12). Additional cities in the U.S. and Europe are planned during the first quarter of 1997. Copies of the Risk Standards for Institutional Investment Managers and Institutional Investors are available on the Internet at: http://www.cmra.com and http://www.gte.com.

I. Management
1. Acknowledgment of fiduciary responsibility
2. Approved written policies, definitions, guidelines and investment documentation
3. Independent risk oversight, checks and balances, written procedures and controls
4. Clearly defined organizational structure and key roles
5. Consistent application of risk policies
6. Adequate education, systems and resources, back-up and disaster recovery plans
7. Identification and understanding of key risks
8. Setting risk limits
9. Routine reporting, exception reporting and escalation procedures

II. Measurement
10. Valuation procedures
11. Valuation reconciliation, bid/offer adjustments and overrides
12. Risk measurement and risk/return attribution analysis
13. Risk-adjusted return measures
14. Stress testing
15. Back testing
16. Assessing model risk

III. Oversight
17. Due diligence, policy compliance and guideline monitoring
18. Comparison of Manager strategies to compensation and investment activity
19. Independent review of methodologies, models and systems
20. Review process for new activities