Regulatory Services
The principals at CMRA have many years of experience both in representing and counseling institutions in their interactions with regulators and in working closely and directly with regulators. With increasing SEC and CFTC enforcement actions and regulatory scrutiny of market manipulation and of an institution's ability to withstand stress scenarios, developing constructive relations with regulators has become a key feature of the financial world. In our experience, an independent and experienced third party such as CMRA can help either to resolve regulatory inquiries and concerns or to identify and remedy potential issues proactively.
We partner with our clients to analyze their risk management processes and controls, to recommend improvements and to report to their regulators. We also partner with regulators to assist them in understanding the nuances of risk management and trading.
Selected Services
Regulatory Inquiries
When it comes to negotiations and communications with regulators, our principals have experience on both sides of the table. We collaborate with financial institution clients to assess the facts related to regulatory inquiries, and also help regulators navigate nuanced topics such as trading, market structure, and market practice. While the details of our work on regulatory inquiries are confidential, we have been engaged to advise on the trading and portfolio management of the following asset classes:
- Derivatives (rates, credit, FX, equity, and commodities)
- Asset-backed securities and mortgage-related assets
- Treasuries and corporate bonds
- Structured product
We have also been called upon as experts in a number of more public engagements:
- Advised the Federal Reserve Board of Governors on the risk management implications of LTCM
- Hired by the Federal Reserve, SEC, CFTC, and NYS Banking Commission to conduct a comprehensive review of Bakers Trust's derivatives business
- Provided expert report and testimony in federal tax court regarding a complex derivatives structure
- Expert in several SEC enforcement actions
- Training of various regulators
Internal Investigations
- We partner with our clients's legal and compliance departments to act as independent advisors during internal investigations, assisting with strategy, data analysis, and fact acquisition.
- The details of our internal investigation projects remain confidential.
Compliance and Risk Review
- Our senior professionals are trusted independent advisors when it comes to our clients' risk management and compliance efforts, including the communication of progress in those areas to their respective regulators. While most of our projects in this area are confidential, we have partnered with various banks, broker dealers, GSEs, and buy-side institutions to improve upon their collaboration with regulators and are well-versed in regulator-mandated stress testing like CCAR, DFAST, and Solvency II.
Market Manipulation Investigations
CMRA Has Been a Leading Voice Regarding Regulatory Issues Since Inception
“Risk is not bad. What is bad is risk that is mispriced, mismanaged, misunderstood, or unintended.”
“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.”
“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. ”
CMRA Regulatory Services Highlight
State Street Department of Labor ERISA Exemption Proposal
“Following the Sale [of certain mortgage, mortgage-related, and other asset-backed securities for $2,447,381,010], State Street engaged Capital Market Risk Advisors (CMRA), a risk management advisory firm, to independently review the reasonableness of prices used to purchase the Securities. CMRA was engaged to assess whether the pricing methodology used by State Street provided a reasonable basis for determining the market value of the assets acquired in the Sale and whether the methodology was appropriately implemented.”
- 74 FR 49033 (September 25, 2009)
Bankers Trust Regulatory Investigation
CMRA was hired by the SEC/Fed/CFTC and NYSB to assist Cadwalader, Wickersham & Taft and Vanable, Baetjer, Howard & Civiletti in the Bankers Trust investigation post P&G and Gibson Greetings. Below is an excerpt from a Bloomberg article titled, "The Floodwaters Are Rising around Bankers Trust."
"...unfortunately, Sanford and Bankers may need a lot more than that. The bank is still reeling from the aftershocks of the huge derivatives losses suffered by many of its clients, a number of whom have stopped doing business with the bank . . . Bankers' derivatives business, which generated 42% of 1994 earnings, lost $171 million in the first half of the year. . . The bank it still under regulatory scrutiny as part of Bankers' settlement of Securities & Exchange Commission and Commodity Futures Trading Commission charges regarding its derivatives sales practices. Derrick Cephas, a former New York State Baking Commissioner and a partner at the law firm of Cadwalader, Wickersham & Taft, and Benjamin R. Civiletti, a former U.S. Attorney General and a partner at Baltimore's Venable, Baetjer, Howard & Civiletti, are auditing the financial institution's operations. Their report will likely be released before the end of the year."
- Bloomberg (October 1995)
CMRA has an extensive history of adeptly bridging the gap between financial institutions and their regulators
Officials also wanted to directly address the parts of AIG’s business that were causing the most financial pain to the company. The continuing deterioration in value of the CDOs … meant that AIG had to post more and more collateral each day, which was a drain on their resources and potentially a threat to their solvency,” says Leslie Rahl, president of Capital Market Risk Advisors, a risk consultancy in New York.
- The Wall Street Journal (November 2008)
. . . It is often said that in a crisis, the markets move in sync. (correlations go to 1.) Asset classes can also move in opposite directions. "Some correlations go to -1," says Leslie Rahl, president of Capital Market Risk Advisors in New York City . . .
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."
Managers can profit from analyzing their holdings for the correlative effects of such common factors as instrument opacity, complexity, illiquidity, and leverage. The key is understanding a portfolio's risk-factor concentrations.
"For instance", says Rahl, "maybe you want a limit in your portfolio on hard-to-value investments that is independent of asset class."
An overlooked common factor in the current credit crisis is vintage. MBS holders and credit rating agencies may have thought the assets behind these instruments were diversified by geography, but they didn't consider that different credit standards, some looser that others, in different years. "Most of these securities," noted Rahl, "were built with a high concentration of a single vintage.
- CFA Magazine (July/August 2008)
...In the rough-and-tumble of real-life trading, things can quickly get messy. 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.
- Journal of Global Financial Markets (Spring 2002)
Orange County didn’t know how much trouble its investment fund was in until… Leslie Rahl spent four weeks sorting it all out from both coasts last fall… [CMRA] uncovered the shocking $2 billion derivatives loss that forced the county into bankruptcy in December.
- Forbes (May 1995)
The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.
Credit default swaps "didn't cause the problem, but they certainly exacerbated the financial crisis," said Leslie Rahl, president of Capital Market Risk Advisors, a consulting firm in New York . . .
- The Wall Street Journal (September 2008)
"One of the questions people have to ask themselves is, how will these synthetic instruments behave in times of stress?" says Leslie Rahl, a former Citibank risk expert who now runs Capital Market Risk Advisors, a risk consultancy in New York. Normal risk modeling only approximates normal markets-the real test comes in extreme markets. And as Rahl likes to say, "We have a once-in-a-lifetime crisis every three or four years."
Even the skimpy historical record may be distorted by the ways that new entrants change market behavior. "There have been significant changes in how the credit markets work," notes Rahl. For instance, "the role of banks in working out bad credits has changed dramatically. Bondholders now play a much more significant role. So looking at data from the 1980s, probably there's little resemblance to the workout patterns and partners of today.
- Investment Dealers Digest (May 2005)
In the wake of problems at Manhattan Investment Fund and at Heartland Advisors and the new SEC guidance on "fair value" pricing for funds, CMRA conducted an NAV/Fair Value Practices survey. Participants included hedge funds, fund of funds, mutual funds and traditional money managers.
- AIMA Newsletter (July 2001)
While the resulting market chaos passed within months, the disputes between derivatives counter parties over valuations, definitions of swap agreements, and other complex matters have lingered. "Many of them are still being played out," said Leslie Rahl, president of Capital Market Risk Advisors in New York, a consultant on risk management and derivatives.
- The Wall Street Journal (January 2000)
After four days of round the clock meetings, the rescue team of county finance officials, consultants and Wall Street experts was within sight of its goal. To prevent a messy and costly liquidation of the fund's $20 billion portfolio, one of four big investment banks would be chosen to restructure the debt's and stop further losses. All that was needed was a green light from the county government. The county hired Capital Market Advisors, a New York consulting firm, last month to do some sleuthing in the portfolio. At that point, the county simply wanted to find out what the portfolio contained. What CMRA found far worse than anyone imagined.
- The Wall Street Journal (December 1994)