Workable Trust Risk Management Framework

Transcription

1 Workable Risk Management Framework Presented by: Rafael G. Ayuste, Jr. June 28, 2016 TOAP Summit 2016 New World Hotel Manila

2 Outline 1. Guidance 2. Risk Management Principles for Fiduciary Activities 3. Risk Associated with Fiduciary Activities 4. Risk Management Process 5. Approaches to Measuring Risks Products and Services 6. The Discharge of Fiduciary Duties

3 Guidance Revisiting the Risk Management Framework Circular 766: Guidelines in Strengthening Corporate Governance and Risk Management Practices on, Other Fiduciary Business and Investment Management Activities Circular 618: Basic Standard for the Administration of & Investment Management Activities

4 Risk Management Principles for Fiduciary Activities One Size Fits All Risk Management Framework doesn t work across the different Entities No single risk management framework that would effectively work for all Entities (TE) Risk Management Similarly, a Single Risk Management Process within a diversified business doesn t work TE s Risk Management framework depends on Size, Complexity, and Risk Profile of the TE s fiduciary activities Practices must be designed to ensure that exposures are well within TEs capacity to manage, risk undertaken by the TE and its clients are consistent with their respective risk tolerance

5 Risk Management Principles for Fiduciary Activities Must capture both TE & Client s exposure Measures both under normal & extreme market conditions The sophistication of risk measurement tool should be commensurate to the level and complexity of exposures Timely review of exposures and exceptions Monitoring must be frequent, timely, accurate and informative

6 Risk Management Principles for Fiduciary Activities Risk Management Process Identify Measure Control Monitor

7 Risk Associated with Fiduciary Activities 1. Credit/Counterparty 2. Market Risk 3. Liquidity Risk 4. Operational Risk 5. Compliance Risk 6. Strategic Risk 7. Reputational Risk Entities Clients

8 Risk Management Process Risk Management Process Risk Process Test Fiduciary Duties Identify Measure Relevant Point of View of Risk Taker Control Monitor Must be Actionable Timely Action

9 Approaches to Measuring Risks Investment Risk Metrics Value at Risk Stress Testing Liquidity Risk Management Portfolio Liquidity Market Liquidity Normal Liquidity Market Crisis Liquidity How relevant are these Risk Metrics across the different Product Lines?

10 Product & Services 1. Mandates & Products Discretionary UITF Directional Documented Mandate Fiduciary Services 2. Mandates & Clients Retail Retirement Funds Discretionary Regulated Products Wealth Management Directional All Types Documented Mandate Corporate 3. Size & Depth of Markets GS Corporate Bonds Listed Equities

11 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Declaration of Risk Manager Process Can it be Identified? Can it be Measured? Can it be Monitored? Can it be Controlled? Risk Process Test Are the Identified Metrics Relevant? Are these vested onto the Risk Taker? Can the Risk Taker act in a Timely manner? Are the results of the measure Actionable?

12 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Declaration of Are all these metrics equally relevant to UITF? Relevant if defined The Risk Taker (Intermediary - PM) is vested with the powers to take action The PM can act in a timely manner given timely information Risk Measurement results are actionable by the PM to reduce or add risk Dependent on Declaration of Portfolio liquidity is pre-defined in the DOT Horizon risk is defined in the DOT as portfolio duration Credit is relevant for Fixed Income instruments

13 Product & Services UITF Retirement Funds Discretionary Regulated Products Wealth Management Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline Risk Manager Process Can it be Identified? Can it be Measured? Can it be Monitored? Can it be Controlled? Risk Process Test Are the Identified Metrics Relevant? Are these vested onto the Risk Taker? Can the Risk Taker act in a Timely manner? Are the results of the measure Actionable?

14 Product & Services UITF Retirement Funds Discretionary Regulated Products Wealth Management Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline Are all these metrics equally relevant for &? Relevance is dependent on client s sophistication & mandate if not defined then not relevant limitation of the risk process The Risk Taker & Intermediary derives very little value from the results of the risk metrics The PM can act in a timely manner given timely information

15 Product & Services UITF Retirement Funds Discretionary Regulated Products Wealth Management Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline Are all these metrics equally relevant for &? (continuation) If not identified, these metrics are not actionable by the PM Thus inability to reduce or add risks The controlling investment guideline (IPS) does not usually measure VaR or stress testing Benchmarking is the more relevant measure of performance return thus risk Portfolio liquidity is defined as an allocation in the portfolio construction process (IPS)

16 Product & Services UITF Retirement Funds Discretionary Regulated Products Wealth Management Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline Are all these metrics equally relevant for &? (continuation) For retirement and pre-need plans : Actuarial study provides on-going guidance on liquidity requirements Horizon risk is defined in the IPS as portfolio duration & maximum tenor of securities Credit is relevant for Fixed Income instruments & identified in the IPS either on a per security or portfolio

17 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline Are all these metrics equally relevant for &? (conclusion) Generally no The controlling RMP is embedded in the institutions Investment Process The operating engagement is the investment guideline (IPS) The Portfolio Construction Process (IPS) guides the Risk Intermediary in defining the risks to be undertaken and measured in terms of : performance (vs. benchmark) liquidity horizon and credit

18 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services Are all these metrics relevant for Directional Mandates? All metrics are not relevant Risk is taken at per transaction (investment) level Risk mitigation is actionable only by the Risk Taker Investment transactions are dependent on CSA but not on the IPS CSA results vs actual investment is owned by client Portfolio liquidity is owned by the Risk Taker Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline

19 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services Are all these metrics relevant for Directional Mandates? Horizon risk is taken by the Risk Taker at the transaction level defined as the tenor Overall risk is taken at a transaction level At point of investment Covering Credit Horizon Liquidity (portfolio & market) Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline

20 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services What Metrics are Relevant for Directional Mandates? (conclusion) Risk Taker is the client thus risk relevant information must be cascaded to the client in a timely manner to enable action Risk relevant information, such as: significant asset price movement changes in credit rating & outlook material market movement Quarterly reporting is not fast enough Portfolio point of view by Risk Taker portfolio composition - liquidity horizon dispersion Investment Risk Metrics Value at Risk (VaR) Stress Testing Liquidity Credit Investment Guideline

21 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services What Metrics are Relevant for Directional Mandates? May additionally provide market liquidity on traded securities End goal is to enable the Risk Taker to take timely action on his/her investment portfolio Investment Risk Metrics Significant Value at Risk price (VaR) movement Material Stress Testing market movement Changes Liquidity in credit rating & outlook Credit Considerable market liquidity Investment changes Guideline Quick information turn-around

22 Product & Services UITF Discretionary Directional Documented Mandate Fiduciary Services What Metrics are Relevant for Documented Mandates? Clear and implementable definition of mandates & responsibilities Clear definition of duties and responsibilities of the and to various parties Compliance to the Mandate including ancillary activities registration funds flow documents flow insurance requirements Risk Metrics Mandate

23 Risk Management Process Risk Management Process Risk Process Test Fiduciary Duties Identify Measure Relevant Point of View of Risk Taker Control Monitor Must be Actionable Timely Action

24 The Discharge of Fiduciary Duties How is the discharge of Fiduciary Duties measured in terms of investments? Is Accreditation Process is good measure of fiduciary duties? If an investment security does not pass the accreditation process should the TE disallow the investment in these assets? If TE will allow, are there safeguards that needs to be done for the TE? Consider that a truly diversified portfolio should have uncorrelated assets to provide for both diversification and risk enhancement (efficient frontier) Should the TE accredit all primary issuances to prevent loss of market or to just remain at par with competition? Should the accreditation process be the same for fixed income and equities? For domestic equities, consider the size of the current market

25 The Discharge of Fiduciary Duties How is the discharge of Fiduciary Duties measured in terms of investments? If TE discloses that an issue or issuer passed the accreditation process, is the TE vetting the credit worthiness or fundamentals of an issue? Are investments offered, recommended or simply made available to TE s clients? Is there an implied vetting for offered and recommended investments? Does accreditation carry implied advice? Should TE disclose the credit rating of an issue to the client to enable the him or her to make an informed decision, especially for directed transactions?

26 The Discharge of Fiduciary Duties World Equities Philippines 0.43% of World Market Cap $273 Billion Listed Stocks - 276

27 The Discharge of Fiduciary Duties ASEAN Equities Market Vietnam 3% Sri Lanka 1% Philippines 13% Singapore 24% Thailand 19% Indonesia 20% Malaysia 20%

28 Diversity of Products & Services Only 41 of the 275 were traded continuously over the past 90 days Average secondary market trade of fixed income securities

29 Risk Management Process Identify Measure Relevant Point of View of Risk Taker Control Monitor Must be Actionable Timely Action Risk Management Process Risk Process Test

30 Thank You