Taking stock of risk

The global financial crisis exposed significant weaknesses in the risk management practices of many funds and banks. Investors and regulators are now demanding that the asset management industry implement far stronger risk management processes including OTC valuation, writes Dr Christian Szylar of Kinetic Partners. Their concerns are illustrated by the EU’s inclusion of requirements for funds to provide far better risk management reporting in the UCITS IV Directive and the draft Alternative Investment Fund Management (AIFM) Directive.

Christian Szylar (+44 (0)20 7862 0749, christian.szylar@ kinetic-partners.com)

In reviewing what has been done over the last few years, it is clear that the valuation processes in place in financial institutions were less than satisfactory. Despite the existence of prudent valuation principles and pricing policies, the recent market turmoil has demonstrated that there were still gaps. The valuation of financial instruments is one of the most important steps (if not the most critical), as pricing will determine the way to measure the inherent risk as well as the liquidity risk.