Derivatives: Optimal Risk Control

by Malcolm, Fraser; Sharma, Pawan V.; Tanega, Joseph

• ISBN13: 9780273635710
• ISBN10: 0273635719
• Edition: 1st
• Format: Hardcover
• Copyright: 1999-07-01
• Publisher: Prentice Hall

Summary

This is the first book to deliver a total strategy for controlling derivatives risk. The strategy is integrated with the organization's wider systems, strategies and culture. Focusing on managing the future and not merely auditing the past, the book is designed to move risk management frown a dead weight cost to a driver of value. The authors successfully integrate the key disciplines of finance, management and international law in a model for truly optimal risk control across the whole business.

Author Biography

Fraser Malcolm BA, MBA Fraser is a Risk Manager at HSBC Midland in London. As a member of the Market Risk Management group situated on HSBC's trading floor, he is specifically responsible for covering the Fixed Income and Credit Trading areas of the bank's activity, including credit derivatives. Pawan V. Sharma BA (Hons) Pawan is a lawyer whose principle areas of practice are UK and US cross-border corporate financings, mergers and acquisitions and UK financial services and law. Joesph A. Tanega BA Princeton, M. Phil Oxon, Juris Doctor Joseph is Senior Associate Member, St Anthony's College, Oxford University, and a Director of Business Risk Consulting, specializing in Financial Services, Ernst andamp; Young, London.

Table of Contents

Foreword	xi
Acknowledgments	xiii
Introduction	1	(16)
Setting the vision: board of directors	17	(16)
Introduction	18	(1)
Major responsibilities of the board of directors	19	(4)
Formulating the risk strategy	23	(1)
Evaluating the use of derivatives	23	(2)
Authorized objectives of derivatives use	25	(1)
Level of the board of directors' involvement	26	(1)
Regular reviews	27	(1)
Competence	27	(2)
Risk analysis	29	(1)
The risk spectrum	29	(4)
Accountability of senior management	33	(10)
Introduction	34	(1)
Senior management responsibilities	35	(1)
Formulating risk policy and procedures	36	(1)
Remuneration levels	37	(2)
Risk limits	39	(1)
Counterparty assessment	39	(1)
Management review and audit	40	(1)
Internal controls and internal audit	40	(3)
Principles of financial engineering, risk control and accountability	43	(12)
Introduction	44	(1)
Extent of financial engineering	45	(2)
Innovative security -- truth or myth?	47	(1)
Justifying the need for innovation	47	(2)
Accountability and optimal risk control	49	(6)
Risk-management operations	55	(44)
Introduction	56	(4)
Increase in complexity of financial markets	60	(3)
Optimization of capital	63	(1)
Integrating risk management	64	(3)
Systemic risk	67	(7)
Market risk	74	(3)
Credit risk	77	(4)
Liquidity risk	81	(3)
Cashflow management risk	84	(1)
Legal risk	84	(4)
Operational risk	88	(5)
Value at risk analysis: risk aggregation	93	(6)
Organizational change -- impacting the value chain	99	(28)
Introduction	100	(1)
Organizational considerations	100	(2)
Making the structure suit the organization	102	(3)
Role of senior level management	105	(1)
Information requirements	106	(4)
Analytical choices	110	(1)
Using a building block approach	111	(5)
Technology: problems and opportunities	116	(7)
People	123	(2)
Timing and phasing implementation of an integrated risk-control project	125	(1)
Summary	125	(2)
The legal arena	127	(56)
Introduction	128	(3)
The legal risk dimension	131	(2)
Legal capacity	133	(2)
Regulation of derivatives activity	135	(1)
Duty of care and fiduciary duties	136	(3)
Liability in derivative sales	139	(1)
Documentation and the use of market standard agreements	140	(2)
Netting	142	(2)
Insolvency	144	(1)
Conflicts of interest -- moving legal counsel in-house	145	(2)
International case law and litigation issues	147	(30)
Cross-border recognition and enforcement of international judgments	177	(1)
Compliance	178	(3)
Conclusion	181	(2)
Strategic response to future risk-management challenges	183	(12)
Introduction	184	(1)
The need for continuous management of change	184	(1)
Knowledge mining	185	(1)
External developments	186	(1)
The holistic approach is still the best way to the future	187	(1)
Managing change is managing the creative gap	188	(1)
Risk drivers	188	(6)
Conclusion	194	(1)
Appendix	195	(4)
References and further reading	199	(4)
Legal references	203	(2)
Glossary	205	(6)
Index	211