JEDDAH: Soaring inflation rates, lack of transparent data, unrated counterparties, limited historical data, regulatory risk, and geo-political risk would be all too familiar concepts to a regional risk manager.
As the GCC markets develop and open up to both global and regional investors alike, the role of the risk manager is becoming increasingly important in trying to mitigate risks and balance risk return profiles.
According to Nadeem Butt, director, Arqaam Capital, “It was not until the late 1980s that many financial institutions across developed markets globally recognized the need for a separate risk management function rather than the individual risks being managed by the respective business lines themselves. This was not an ideal situation from a senior management point of view and due to the numerous financial scandals that arose, most notably the downfall of Baring Banks in 1995.”
The developments put enormous pressure on the regulators to take some form of action to promote stability in the financial markets and set a common standard across firms. One such directive was the introduction of the Basel Accords (I and II), which was a set of best market practice standards. It should be emphasized, however, that it was not compulsory then for all firms to follow the Basel guidelines.
“The GCC as a region has its own set of unique risk factors some of which are listed above coupled with the traditional risks common in the global marketplace. The real challenge that exists is in determining how some of the risk management techniques and models used globally in reviewing market and credit risks can be applied to this region and how do you get around some of the assumptions made,” continued Butt.
A classic example illustrating this point would be in trying to look at portfolio Value at Risk (VaR) for which there are three well known methodologies but two of which assume that price distributions follow a log normal pattern, which is unrealistic at best.
Today the UAE Central Bank has recognized the importance of regional financial institutions being proactive in managing their risks in line with international standards and is promoting the banking sector to be Basel II compliant over a period of time.
This is becoming a greater priority with the emergence of derivatives platforms across regional markets and will inevitably bring additional challenges to the markets.
“Clearly there are real challenges that do exist from a risk perspective but what will differentiate firms from one another will be those whose approach internally will be based on a strong control culture and sound methodologies,” concluded Butt.
