Oct 272014

The CFP wishes our Senior Fellow and Professor-of-the-Practice, Cliff Rossi, a happy pub-day!  His new book on the fundamentals of risk management was released yesterday by John Wiley & Sons.

The book is a case study of one systemically important financial institution covering their governance practices and various risks over boom and bust periods. It represents an intersection of theory and application leveraging realistic examples of credit, market, interest rate, operational, liquidity and other risks along with ways to hedge those risks.  The book is a crossover for industry practitioners and graduate students and provides a roll-up the sleeves approach to managing all the risks of a stylized financial institution. 

Please visit the Wiley website to purchase.


A Risk Professional’s Survival Guide

Balanced, practical risk management for post – financial crisis institutions

Fundamentals of Risk Management fills a critical gap left by existing risk management texts. Instead of focusing only on quantitative risk analysis or only on institutional risk management, this book takes a comprehensive approach. The disasters of the recent financial crisis taught us that managing risk is both an art and a science, and it is critical for practitioners to understand how individual risks are integrated at the enterprise level.

This book is the only resource of its kind to introduce all of the key risk management concepts in a cohesive case study spanning each chapter. A hypothetical bank drawn from elements of several real world institutions serves as a backdrop for topics from credit risk and operational risk to understanding big-picture risk exposure. You will be able to see exactly how each rigorous concept is applied in actual risk management contexts. Fundamentals of Risk Management includes:

  • Supplemental Excel-based Visual Basic (VBA) modules, so you can interact directly with risk models
  • Clear explanations of the importance of risk management in preventing financial disasters
  • Real world examples and lessons learned from past crises
  • Risk policies, infrastructure, and activities that balance limited quantitative models

This book provides the element of hands-on application necessary to put enterprise risk management into effective practice. The very best risk managers rely on a balanced approach that leverages every aspect of financial operations for an integrative risk management strategy. With Fundamentals of Risk Management, you can identify and control risk at an expert level.

Oct 262014

The key theme this week in financial policy is that there isn’t much of a theme at all.  The biggest story was the New York Fed President’s, William Dudley, remarks at the Workshop on Reforming Culture and Behavior in the Financial Services Industry.  He warned banks that they must fix their culture, which encourages misdeeds, or risk being broken up.  If the firms could not it would send a signal they were too large to manage appropriately and, “in that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.”


Dudley Warns Banks Must Improve Culture or Be Broken Up



 Did Bank Rules Kill Liquidity?


Regulators Worried About Trendy New Product


High-frequency trading: Focus moves from speed to safety


Why High-Frequency Trading Is So Hard to Regulate


Fund Managers Push For Safer Trading Waters In Dark Pools


Fed Stress Tests Similar to 2014



Oct 212014
Bill Longbrake

Bill Longbrake

In recent days, market sentiment has shifted from optimism and complacency to pessimism and fear. Significant and troublesome imbalances have been building in the global economy for a long time but the threats they pose to global economic well-being have largely been ignored. But now the possibilities of much slower growth in China, failure of Abenomics in Japan, and deflation in Europe, not to mention the existential threat to the euro and the European Union, are being discussed more openly.

In this month’s letter, Bill Longbrake explains why unfavorable demographic trends, excess supply of goods and services relative to underlying demand, monetary profligacy, negative real rates of interest, and huge and rising debt-to-GDP ratios collectively are fostering a global deflationary bust in which increases in prices and output slow, or even fall, and bankruptcy potential rises for firms and countries.

View the full report.

Oct 172014

The extreme volatility across financial markets over the past week overshadowed several interesting developments with respect to dark pools, which garner about 15% of all equity trading.  One major US bank decided to close their dark pool, while another brokerage house announced new rules with respect to how orders are executed in anticipation of a change in regulations.  The SEC confirmed they are investigating how orders are routed and payment systems, topics covered at the CFP conference held in September with FINRA.  Please visit the CFP’s website to view the papers and presentations from that event.

Over the last few weeks this round-up highlighted several stories outlining the risks related the fixed income market’s structural shortcomings.  The lack of liquidity and transparency in the fixed income market isn’t an issue created by the financial crisis, but it has been exacerbated by the regulations aimed at preventing another.  The Dodd-Frank Act’s provisions regarding capital requirements and restrictions on prop trading effectively reduce a bank’s incentive to hold an inventory of bonds and by extension their market-making capabilities.  The net result is a dramatic reduction in liquidity in the secondary market, which has even led to questions over the valuation of some rarely traded issues.

Professor Pete Kyle believes the fixed income market’s current structure is similar to the NASDAQ market in the 1980’s and early 1990’s, when almost all trades involved registered market makers on one side of the trade or the other. After the Department of Justice and the SEC forced changes in order handling rules in the late 1990s, non-broker-dealers were able to post limit orders and trade with one another, like they had been able to do for many years on the NYSE.  Professor Kyle thinks that these change decreased bid-ask spreads on NASDAQ relative to the NYSE. There have been a number of attempts by fixed income market participants to create customer-friendly trading platforms.  Professor Kyle thinks that now is the time for such platforms to gain permanent traction.  Platforms which allow non-broker-dealers to supply liquidity to one another directly will allow market participants themselves to overcome some of the tendencies of the Dodd-Frank Act to reduce liquidity.


ConvergEx to change dark pools ahead of regulations


Wells Fargo to shut its ‘dark pool’ as demand falls


High-frequency trading firm fined for wave of last-minute trades


High-Frequency Trader Athena Capital Settles Stock-Manipulation Charges


Dark Pools Face More Enforcement Actions, SEC Lawyer Says


Volckerized Wall Street Dumping Bonds With Rest of Herd


Fund Traders Dig Deep for Bonds




Oct 102014

News regarding the shortcomings in the fixed income market’s structure and liquidity, as noted in previous round-ups, continued to develop this week.   A consortium of banks announced an initiative to set up a one-stop shop for corporate bonds to help ease the liquidity shortage, due in part to post-crisis capital requirements on banks and broker-dealers.  These requirements reduce a bank’s incentive to hold an inventory of bonds and act as a traditional liquidity provider, especially in the secondary market.  The New York Times Dealbook reported that banks and regulators are expected to agree on a change in derivatives regulation intended to contain damage to the broader financial system if a large bank were to fail.  The Financial Stability Board could announce a change as early as this weekend.

Banks Unite to Set Up One-Stop Shop for Corporate Bonds

Bond Managers Struggle with Liquidity Risk

Regulators Revisit Criteria For Systemically Important Firms

Metlife Contest Systemically Important Label from FSOC

Expected Change in Derivatives Aims to Curb Damage From Bank Failure

Change in Derivatives Doesn’t Resolve Question of Safe Harbors

Regulatory Pressure Leads Banks to Sit out Funding of TransFirst Buyout