What risk management should be

I had the pleasure of listening to Rick Nason from RSD Solutions and Dalhousie University speak last night at the Fields Institute in Toronto. There have been opportunities to go to PRMIA-sponsored risk management presentations in the past, but I rarely attend for fear that I would be the only person in the crowd who has not memorized everything John Hull has ever written or is carrying an HP 17B. Said another way, I have better things to do than hang out with risk nerds.

And therein lies the irony about Rick Nason. On paper he is physicist, CFA and PhD and teaches a risk management course. That pedigree often means presentations with Greek letters and papers referencing guys with Russian last names. But having read Rick’s blog recently, I knew he was not your every day math/rocket scientist/physics nerd. Rick is a character. I liked him.

I also liked what he had to say because I agreed with it. To a crowd of risk managers and wannabees he proposed a different approach to risk management. It was my approach. He proposed less models and more business partner. He proposed the sort of risk manager that I was ten years ago when I had risk oversight responsibility on an institutional equities trading desk. I managed my desk with carrots and not sticks and viewed my role as someone who facilitated transactions for traders rather than outright denying them. When a trader wanted to exceed a limit, he was proactive and asked me; and if there was a really good story for taking the trade, I approved it. I didn’t plug it into a VaR model to see what it did or ran any simulations.

To all you risk managers reading this is horror, please understand that traders are like children: if you punish them every time they do something wrong, eventually they won’t tell you anymore and will do it anyway. But if you are their partner and have a relationship built on trust and honesty, then they will do their best to be honest with you in return.

The trouble with most of the people in risk positions and hiring for risk positions, is that they don’t know what risk management should be. For those of you not there last night, just read the Riskczar blog or what Rick writes, to find out. For example, I’ve been looking at risk management job descriptions recently and most of them are asking for Chartered Accountants or requiring the risk manager to perform internal audits or Sarbanes-Oxley crap. While Rick and I will agree this is not risk management, unfortunately the gatekeepers of risk management roles are CFOs and accountants or stuck in the 1990s and don’t know any better.

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