Executive Committees Risk Management Expectations

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OppenheimerFunds
Executive Committees Risk Management Expectations

Frontiers in Operational Risk and Capital
Allocation September 28, 2007
Navin Sharma Vice President, Director of Risk
Management
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Risk Management Expectations

• Executive Committees include
• Boards
• Senior Management
• Risk Management Committee(s)
• Business Management
• Expectations met by
• Robust framework
• Rigorous and explicable processes
• Lucid and consistent communications

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Risk Management Expectations

• Why is this important, especially today?
• EC/Boards fiduciary responsibilities
• Regulatory oversight
• Additional scrutiny due to firms headline risks
• Sarbanes-Oxley
• Greater use of derivatives (esp., credit)
• Fed Directive (August 2005)
• Recent credit meltdown
• Diversified and global financial operations

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Risk Management Expectations

• Why is this important, especially today?
• Risk management arena is maturing
• What are key risk issues to provide to ECs?
• Need to educate ECs
• Need to ensure completeness of provided info
• What is the right amount of information to be
  provided?
• CROs need to be proactive in addressing these
  expectations!

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Robust Framework

• Alignment of corporate objectives
• Risk management is
• good corporate governance
• which is a facet of proper business management
• Key facets of risk management mission
• Enhance risk-adjusted returns.
• Identify and address unintended risks.

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Robust Framework

• How to best define Risk?
• Risk Ownership and Oversight
• Successful Risk Management
• Approaches and Measures
• Integration of enterprise risks

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Robust Framework

• Risk is Events resulting in financial or
  reputational loss and inhibiting business goals.
• Key risks include
• Investment market and credit
• Operational technology, information
• Business reputation, legal

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Robust Framework

• Approach to meeting executive committee
  expectations for any of the key risks
  (investment, operational, business) is the same.
• However
• Investment risks optimize to achieve
  risk-adjusted returns! (inherent alpha)
• Operational and business risks minimize!

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Robust Framework

• Risk Management defined
• Process of assessing and mitigating risks to
  minimize unexpected losses and optimize
  risk-adjusted returns.

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Robust Framework

• Risk Ownership and Oversight
• Risk Ownership
• By all employees (varied risks)
• Business lines (focused risks)
• Oversight Risk Management
• Mission Enhance Investment Returns
• Tops-down risks capture
• Bottoms-up risks capture
• Roll-up risks enterprise-wide
• Collaborative approach is key

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Risk Management Model
Top-Down Business Management
Risk Management Committee Boards of
Directors

• Risk Oversight
• Enterprise Risks Rollup

Risk Management

• Detailed Risks Breakdown
• Spend Risk Wisely to Gain Return

Bottom-Up Portfolio Managers Ops risks breakouts
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Rigorous and explicable processes

• Successful Risk Management is
• Collaborative
• Facilitate risk awareness in firm
• Sound business judgment
• Good communications skills
• Integrated
• Quantitative and qualitative analyses
• Market risk and operational risk

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Rigorous and explicable processes

• Establish collaborative risk control framework
• Market risk (optimize, not reduce)
• Risk management process should reflect investment
  processes
• Build and calibrate benchmarks to peer groups
• Creates consistency between portfolio managers
  investment processes and risk management.

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Rigorous and explicable processes

• Operational risk (minimize)
• Risk management process should reflect
  operational processes
• Build and calibrate Key Risk Indicators to
  reflect most prevalent operational risks
• For example, if heavily invested in derivatives
• Scrutinize docs and settlement delays
• Consider breadth of counterparty exposures

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Rigorous and explicable processes

• Operational risk
• Qualitative approach - Metrics
• Counterparty risk - stratify exposures
• Technology (systems, projects)
• Informational (data, accounting)
• Business risks (reputation, legal)
• Senior management-level reports
• Compliance reporting

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Rigorous and explicable processes

• Operational risk
• Qualitative approach - Metrics
• Counterparty risks
• Over-exposures how much is too much?
• Hard limits?
• Soft limits?
• How determined?
• Settlement risks

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Rigorous and explicable processes

• Operational risk
• Quantitative approach
• Counterparty risks
• Simulate loss of positive exposures to
  counterparties
• Simulate default risks of counterparties
• Mutual funds limits setting decisions will
  differ from banks decisionswill differ from
  sell-sides decisions

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Rigorous and explicable processes Integrated
market and credit risk
Viewing different risks within the same framework
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Rigorous and explicable processes

• Operational risk
• Thorough counterparty review process
• Prudent and critical in todays environment!
• Ensure modeling of all OTC derivatives into risk
  management process prior to purchase
• Ask questions of brokers/dealers!
• Join Novations Protocol process

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Rigorous and explicable processes

• Integration of all risks
• Counterparty risk yes.
• Others - primarily via dashboard reporting.
• Form senior-management committee to review
  enterprise-wide risks.

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Lucid and consistent communications

• Senior-management committee to review and act
  upon
• enterprise-wide risks that are
• rolled up from the
• market risk committee
• and
• operational risk committee

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Lucid and consistent communications

• Provide to executive committees
• Summaries of investment risks
• Summaries of operational risks
• Risk management department is nexus for capturing
  overlaps
• Risk team must be ensconced within businesses
• Risk team must actively enhance collective risk
  knowledge

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Lucid and consistent communications

• Ensure industry best practices
• Investment Company Institutes Risk Management
  Advisory Committee
• Role of the CRO (completed)
• Boards-CRO Interaction Project
• Chaired by Navin Sharma
• We seek your comments!

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Lucid and consistent communications

• Ensure industry best practices
• Professional Risk Managers International
  Association (PRMIA)
• Risk handbooks
• Contact with industry practioners
• SIFMA (joined- BMA and SIA)
• Setting numerous operational risk standards.
• Designing credit derivatives benchmarks to ensure
  timely settlements ask me to get involved.

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Whats on the risk horizon?

• Consistency of risk management processes and
  procedures within financial industry
• Customized stratifications across mutual funds,
  banks, sell-side, insurance, hedge funds.
• Continued closer interactions between risk
  department and firm-wide areas
• Enterprise-wide, comprehensive risks roll-up
  committees
• Enhanced modeling of credit and counterparty
  risks and tail-events

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Whats on the risk horizon?
Greater independence of risk organizations in our
industry Incorporation of risk teams as
alpha-contributors rather than just risk
assessors Further melding of investment risk and
operational risk personnel Greater acceptance of
sophisticated risk approaches by regulatory
organizations (UCITS III, Basel II) Greater
emphasis on disaster/recovery methods
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Biography
Navin Sharma Vice President, Director of Risk
Management Oppenheimerfunds, Inc. Navin Sharma
is Vice President, Director of Risk Management at
OppenheimerFunds, Inc. with oversight and
reporting of investments risks, especially
market, credit and liquidity risks. He is also
responsible for the analysis and reporting of
investments risks to the OppenheimerFunds boards
and chairs the firms Risk Management Committee.
Additionally, his team serves as a quantitative
resource to various departments of the firm
requesting financial or risk analysis. His team
is also responsible for performance attribution
and measurement for the Investments
department. Mr. Sharmas background includes
over 20 years in the financial industry, both on
the sell-side and the buy-side. His previous
positions have included working as a Senior
Quantitative Analyst in the Vanguard Groups
fixed-income department, a Senior Quantitative
Analyst in Fannie Maes Credit Policy department,
and a Senior Quantitative Analyst in the equity
derivatives analytics group at Nomura Research
Institute. He received a Master of Science
degree from the Moore School of Engineering at
the University of Pennsylvania in 1984. Mr.
Sharma has been a speaker at Incisive Medias
(Risk Magazine) Asset/Liability conference, at
Citigroup and Northfield Information Systems
conferences, as well as at the Wall Street
Journal/World Research Groups risk, municipal
and performance attribution conferences. He has
written articles in various financial industry
publications. He is a sustaining member of the
Professional Risk Managers International
Association and the International Association of
Financial Engineers. He is an active member of
the Investment Company Institutes Risk Advisory
Committee, and the Buy Side Risk Managers Forum.
Email nsharma_at_oppenheimerfunds.com Phone
212.323.5212