March 2020

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Finadium has conducted an investigation on how large market participants in securities finance manage risk. Our coverage includes how risk managers are positioned in the organization, what methodologies are employed, and the types of risks being evaluated. The report concludes with what risk managers in securities finance tell us are their next steps for organizational and product development.

While it was not difficult to identify risk managers in securities finance in this report, it became a complex matter to define current best practice. Across prime brokers, dealers, agent lenders and beneficial owners, each firm or group of firms had their own ideas about what risks were most important. This results in a divergence in what risks are measured and how organizations are prepared to respond to market dislocations.

At the same time, there is a sense of what best practice should be among the professionals we surveyed. Managers spoke about key metrics and ways of looking at risk that suggest a cohesive view is possible, although it may take greater industry coordination to get there. This report presents 14 best practices highlighted by market professionals.

This report should be read by any market participant interested in risk management in securities finance. It may be most useful to risk managers themselves to benchmark against their peers. It should also serve regulators, technology firms and business managers interested to assess the strengths of their organizations.

Table of Contents

  • Executive Summary
  • Industry Thinking on Risk
    • – Methodology
  • Placing Risk Management in the Organization
    • – Desiloing and Credit Lines
  • Top Risks Being Evaluated
    • – ESG Risk
    • – Liquidation Risk
  • VaR and the Expected Shortfall Method
    • – Range and Limits of VaR
    • – Expected Shortfall
    • – Stress Testing
  • The Risk Manager Wish List
  • Appendix A: Summary of Best Practices
  • About the Author
  • About Finadium LLC

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