3 C Global Best Practices

Global Best Practices in Risk Management
33rd Annual SoCal EXPO April 24-25,2014

Presented by:
S.L. (Sam) Srinivasulu, Ph.D
Chairman, KESDEE Inc.
5280 Carroll Canyon Road,
Suite 220, San Diego,
CA 92121, U.S.A
Tel : 858-558-8118 email: srini@kesdee.com
Fax: 858-558-8448 website: www.kesdee.com
© 2014 KESDEE Inc. All rights reserved.

BIO
• S.L. (Sam) Srinivasulu, Ph.D. is Chairman of KESDEE Inc., a financial
eLearning company
• He has a PhD from the Graduate School of Business Administration, University

of Michigan, Ann Arbor
• For over 25 years, he has presented several in-house and public training
programs to senior financial executives in 40 countries on topics of Asset
Liability Management and Risk Management
• He was invited by the U.S. Federal Reserve System to conduct Executive

development programs to the supervision and regulation staff of the Federal
Reserve System. This five year project was the catalyst for establishing
KESDEE Inc., a financial e-Learning company (www.kesdee.com).
2 © 2014 KESDEE Inc. All rights reserved.

Summary
The Presentation on “Global Best Practices in Risk Management” covers the following
aspects:
• A Framework for Analysis of Best Practices in Risk Management. The

components of an integrated approach.
• How are Best Practices arrived at?
o Global Database of Disclosures, Benchmarking Data, Case Studies, Focus
group discussions and interviews.
• Results of Best Practices organized by strategic, organizational, operational
and other aspects.
• A Plan of Action: How to Implement Best Practices?
• Concepts / Case Studies relevant for both Financial Service industry &
multinational corporations.
The presentation is based on a five-year assignment with the US Federal Reserve

System. The Project involved designing & delivering Executive Development Programs
on several aspects of Risk Management for senior regulators, policy makers and
examiners.
*Several recent well known case studies will be incorporated in this presentation.
A comprehensive framework – 9 part
framework
Global Best Practices in Risk Management

“ The strength of the chain is the strength of the weakest
link in the chain. “

• Best practice institutions take a proactive, not a reactive
approach to Risk Management as part of Balance Sheet
Management
• The function is integrated with other business strategies.
Case Examples
E.g: Business Portfolio Mix
Corporate: Metallgesellschaft

Risk Approach

Best Practices Institutions view Risk
Management not from the perspective of
compliance or control but from the
perspective of value creation

Best practice institutions have a clear
articulation of the amount of risk to be
taken. They are quantified, pre-specified,
and measurable

Best practice institutions control both the
volatility of P&L Statement and Balance
Sheet

Best practice institutions manage risk, not
eliminate them.
The watchwords are:

 Risk by choice, not by chance
 Exposure by choice, not by chance

Strategic Process
Best practice institutions have Risk

Management function acting as a catalyst for
the formulation of strategies

Risk Management Infrastructure
Best practice institutions have the following elements

that constitute a sound risk management system:
1. Active board and senior management oversight
2. Adequate policies, procedures and limits
3. Adequate risk measurement, monitoring and

management information systems
4. Comprehensive internal controls

• Best practice institutions ensure that all the employees read from
the same script and sing from the same sheet of music. Every
employee of the institution, is sensitized to the issues of Risk
Management.
• All need to march to the same beat of the drum

Policy Statement
• Best practice institutions have a well-articulated

policy statement generally approved by the
Board of Directors.
• The policy statement is customized and is not a

"cookie cutter" ; they believe that "one size does
not fit all"

Policy Statement (Contd…)
• The policy statement provides a clear direction

to the Risk Management function
• The policy statement is clear, concise, relevant,

and timely

Derivatives
Best practice institutions view derivatives as a

double-edged sword - they are not an end but
a potential means to accomplishing a strategic
objective.

Derivatives (Contd…)
Major high profile derivative disasters have one
important lesson:
Derivatives were used not in the context of or in
the pursuit of business objectives. So, the
lesson is do not put 'cart before the horse'.
First, the objectives have to be formulated and

then an evaluation is to be made whether
derivatives have a role, if any, in accomplishing
those objectives.
Derivative Strategies
Best practice institutions follow simple, easy-to-
understand derivatives strategies for their Risk
Management; in particular, they avoid exotic
products/leveraged structures.
The watchword is “Keep It Simple, Smart".

Analytical Framework
• Best practice institutions use an eclectic mix of
analytical techniques such as mismatch analysis,
simulation, duration, and value at risk depending on the
structure, size and maturity of Foreign Exchange
exposures.
• No single technique is regarded as better than the

others by best practice institutions. They view these
techniques as complementary diagnostic tools.

Information Reporting Framework
Best practice institutions share Risk Management

information among employees at right frequency and at
the right level of detail. They ensure that the
amount/type of information received is
appropriate/necessary for the recipients' task.
An appropriate balance between information overload

and the dearth of information is maintained.

Performance Measurement
Framework
A Case example on:
• Hedge/Arbitrage/Speculation
• Risk Based Framework

Control Framework
Best Practice institutions ensure that the Risk

Management limits are articulated to place a
"ring fence" around operating managers rather
than tying their hands with rigid limits. They
strive for a judicious balance between "tight
controls" and "loose controls".

Best Practices institutions primary emphasis is on
Strategies for Exposure Reduction and not on
techniques for Noise Reduction
• Examples of noise reduction: Purpose
• Examples of exposure reduction: Purpose

Risk Management and Treasury
Management closely linked to business
portfolios
• Corporate Example

• KNOW WHAT YOU DO NOT KNOW: BACK TESTING
• THINK THE UNTHINKABLE: STRESS TESTING

How to Implement Global Best Practices ?
A Plan of Action: 3-Step Approach

Risk Management for Value Creation
Risk Management for Compliance
Vs
Risk Management for Value creation

Mind Set & Skill Set

• Base Case => P&L
• What-If Analysis

• Treasury and Business Units
• Communication
• Co-ordination
• Collaboration

Plans are nothing, Planning
is everything.

Risk Management’s link to Business
Strategy

CASE STUDY IN RISK
MANAGEMENT FROM
KESDEE E-LEARNING
COURSES
36
© 2014 KESDEE Inc. All rights reserved.
Case Study
1. Barings
2. National Australia Bank
3. Bankgesellschaft Berlin
4. LTCM
5. Bankers Trust
6. Orange County
7. Metallgesellschaft
8. WorldCom
9. Northern Rock
10.Taisei Fire and Marine Insurance Co
11.Fannie Mae and Freddie Mac
12.China Aviation Oil
13.Washington Mutual

About KESDEE
KESDEE is the world's largest financial e-learning company.
KESDEE's e-learning catalog consists of 750 accredited e-Learning courses on various

topics in following areas:
• Banking
• Finance
• Accounting
• Risk Management
• Insurance
• Financial Planning/Wealth Management
In addition, KESDEE offers e-Coaches, the web-based Tutorials for Certification Exams in
Risk Management and Financial Analysis.
KESDEE e-learning solutions are also available in Spanish.
Hull on Derivatives course Library is available on our portal “John Hull e-learning from
KESDEE”.
Kaplan / KESDEE web based exam preps are available for Insurance Achievement
Content.
For more details, please visit www.kesdee.com.

Contact Information
KESDEE Inc.
5280 Carroll Canyon Road,
Suite 220, San Diego
CA 92191, U.S.A.
Tel: +1-858-558-8118
Email: srini@kesdee.com

Thank you!

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Global Best Practices in Risk Management

33rd Annual SoCal EXPO April 24-25,2014

© 2014 KESDEE Inc. All rights reserved.

• He has a PhD from the Graduate School of Business Administration, University

• He was invited by the U.S. Federal Reserve System to conduct Executive

2 © 2014 KESDEE Inc. All rights reserved.

• A Framework for Analysis of Best Practices in Risk Management. The

The presentation is based on a five-year assignment with the US Federal Reserve

Global Best Practices in Risk Management

4 © 2014 KESDEE Inc. All rights reserved.

5 © 2014 KESDEE Inc. All rights reserved.

6 © 2014 KESDEE Inc. All rights reserved.

7 © 2014 KESDEE Inc. All rights reserved.

8 © 2014 KESDEE Inc. All rights reserved.

9 © 2014 KESDEE Inc. All rights reserved.

10 © 2014 KESDEE Inc. All rights reserved.

The watchwords are:

11 © 2014 KESDEE Inc. All rights reserved.

Best practice institutions have Risk

12 © 2014 KESDEE Inc. All rights reserved.

Best practice institutions have the following elements

1. Active board and senior management oversight

2. Adequate policies, procedures and limits

3. Adequate risk measurement, monitoring and

4. Comprehensive internal controls

13 © 2014 KESDEE Inc. All rights reserved.

14 © 2014 KESDEE Inc. All rights reserved.

• Best practice institutions have a well-articulated

• The policy statement is customized and is not a

15 © 2014 KESDEE Inc. All rights reserved.

• The policy statement provides a clear direction

• The policy statement is clear, concise, relevant,

16 © 2014 KESDEE Inc. All rights reserved.

Best practice institutions view derivatives as a

17 © 2014 KESDEE Inc. All rights reserved.

First, the objectives have to be formulated and

The watchword is “Keep It Simple, Smart".

19 © 2014 KESDEE Inc. All rights reserved.

• No single technique is regarded as better than the

20 © 2014 KESDEE Inc. All rights reserved.

Best practice institutions share Risk Management

An appropriate balance between information overload

21 © 2014 KESDEE Inc. All rights reserved.

A Case example on:

• Risk Based Framework

22 © 2014 KESDEE Inc. All rights reserved.

Best Practice institutions ensure that the Risk

23 © 2014 KESDEE Inc. All rights reserved.

• Examples of noise reduction: Purpose

• Examples of exposure reduction: Purpose

24 © 2014 KESDEE Inc. All rights reserved.

25 © 2014 KESDEE Inc. All rights reserved.

• THINK THE UNTHINKABLE: STRESS TESTING

26 © 2014 KESDEE Inc. All rights reserved.

A Plan of Action: 3-Step Approach

27 © 2014 KESDEE Inc. All rights reserved.

Risk Management for Compliance

Risk Management for Value creation

28 © 2014 KESDEE Inc. All rights reserved.

29 © 2014 KESDEE Inc. All rights reserved.

30 © 2014 KESDEE Inc. All rights reserved.

32 © 2014 KESDEE Inc. All rights reserved.

33 © 2014 KESDEE Inc. All rights reserved.