A few month ago a journalist asked us to come up with some questions relevant to the risk management function for an article he was writing. In light of the Central Bank of Ireland’s recent letter “Thematic Review of Risk function” (available here) we thought it might be timely to reproduce the list below:
Questions the Board should ask of itself
- Does the Board have a risk management policy in place?
- Is it appropriate to have a risk sub-committee?
- Does the Risk Director / Designated Person (RD/DP) have relevant market experience?
- Does the RD/DP have access to timely and relevant risk information?
- Does the board have a risk profile for each fund detailing all relevant risks and accompanying risk appetite and risk capacity for each relevant risk?
- Is the fund’s risk function independent of the fund portfolio management function?
- Is there an escalation process in place to manage limit breaches that includes the RD/DP in extremis?
- Is there a regular review of the effectiveness of the Board and RD/DP oversight of the risk management process?
Questions the Board should ask of the Risk Management Function
The only real question is if it is fit for purpose. That is, can it independently monitor, in a timely fashion, all of the relevant risks to which the fund is exposed and can it act appropriately in extreme conditions? This can be broken down to the following:
- Do the personnel performing the risk function have the appropriate level of experience and expertise?
- Is the risk function reliant on one person or is there a team in place?
- Has the risk manager manged risk in a crisis situation (stressed markets)?
- Does the risk function have the necessary independent tools to undertake the totality of the risk management function?
- Does the risk management function have a direct reporting line to the RD/DP?
- Is there a written policy detailing situations where the risk management function has the authority to alter the risk of the fund?
- Is the senior risk manager on the Board or attend all Board meetings?
- How is the risk manager(s) remunerated and does their remuneration depend on the performance of the fund(s)?
- From which source does the risk manager receive position data (Portfolio Managers / PBs / Administrator)?
- From which source does the risk manager receive time series and indicative data?