After companies were invited to open trading on the London Stock Exchange last week, the Bank of England has now announced that it will review market risk managers involved in the bid for the group. Since the financial crisis, risk managers have become indispensable in the daily trading world, as the US Federal Reserve explores in a recent report in their Trading and Capital-Markets Activities Manual.
“The primary goal of risk management is to ensure that a financial institution’s trading, position-taking, credit extension, and operational activities do not expose it to losses that could threaten the viability of the firm,” the report read.
According to the Financial Times, operational resilience and cyber security will be a priority for the central bank now as it will develop living wills for the four clearing houses that it is overlooking. Risk managers usually sit in the middle of two sides of a deal and manage risk in case one party fails to pay.
In order to ensure that organisational structure is managed, the Federal Reserve report lists what the role of the risk manager should involve, as “the risk measurement and management of an institution will only be as strong as its internal control system”:
- Define trading-risk-management policies
- Set uniform standards of risk assessment and capital allocation
- Provide senior management with global risk reporting and evaluation
- Monitor compliance with limits
- Assist in strategic planning related to risk management
These responsibilities can be used to monitor and keep market risk factors, such as interest rates, foreign exchange rates, equity prices and commodity prices, at bay. “Institutions should ensure that they adequately measure, monitor, and control the market risks involved in their trading activities,” the report said.
After the Bank of England annual survey conducted at the end of last week, it was revealed that the average daily amount of initial margin held at the UK clearing houses controlled by the LSE, Intercontinental Exchange, CME Group and the London Metal Exchange totalled more than £80 billion, an increase from £69 billion the year before, according to the FT.
David Bailey, director of Financial Markets Infrastructure Supervision at the central bank and former JPMorgan banker said that these numbers show that risk is concentrated in these areas. “People tend to focus on the financial risks…operational risk is just as big a concern from our perspective. We want to make sure our clearing houses are not just financially robust but they can continue to offer their services on an ongoing basis,” Bailey said.
In other related news, governor of the BoE Mark Carney is set to provide evidence this week about the impact the potential Brexit could have on London’s market infrastructure.