Protective Firewall

Effective risk governance demands that the trading function is separated from the risk management function. We have key individuals who are independent of the trading function and who monitors the positions taken by the traders and price them independently. The risk manager has the responsibility to monitor risk levels for all portfolio positions (as well as for portfolios as a whole) and to execute any strategies necessary to control the level of risk.

Effective Communication

Our trading desks provide the risk management team with timely and accurate information, authority, and independence from the trading function. Additionally, our traders have their own risk management expertise in order to allocate capital in an optimal fashion and maximize risk-adjusted profit. Our risk manager works with the trading desks in the development of risk management specifications, such that everyone in the organization is working from a common point of reference in terms of measuring and controlling exposures.

Risk Budgeting

Risk budgeting involves establishing objectives for traders that take into account the allocation of an acceptable level of risk. As an example, our foreign exchange (FX) trading desks are allocated certain levels of capital and permitted a specified daily Value at Risk (VaR). In other words, each trader is granted a budget, expressed in terms of allocated capital and an acceptable level of risk, expressed in dollar amounts of VaR. The important takeaway is that we allocate risk capital before the fact in order to provide guidance on the acceptable amount of risky activities that a given unit can undertake.

Performance Evaluation

In order to maximize risk-adjusted return through the capital allocation process, we must measure performance against risks assumed and budgeted at both the firm level, sub-strategy level, overall portfolio level. All trading activities are evaluated against the risk taken, investment performance is measured from a risk-adjusted perspective.