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Wednesday, September 18, 2013

31000 Frameworks for Market Risk

A recent discussion on the G31000 risk forum opened up an interesting debate that ISO 31000 doesn't really include explicit detailing on how to treat market risk, credit risk or whether it is or should be enterprise risk wide at all.

We have taken to write this posting as a complete whitepaper that shows how to apply ISO 31000 to a firm wide market risk requirement.

In this blog we share the 31000 Risk Framework whitepaper for market risk [LINK].

Is ISO 31000 Enterprise Wide
If you were to read ISO 31000 front-to-back, you would learn how to assemble a risk framework for capturing "uncertainty in objectives". This framework isn't prescriptive, it talks about the different types of risks that a risk manager should investigate, the alternate causes and outcomes of risk but the standard doesn't provide further details on how these alternate risk delineations can be measured, there simply is little guidance at all.

Is risk really just risk, that would leave the whole standard open for interpretation.

To solve the risk is just risk problem, the ISO 31000 standard pack also includes another document for readers titled "ISO 31010 - Risk Assessment Techniques". This additional guideline explains how to measure operational risk and it includes some fantastic statistical models that could actually be applied to different risk denominations in the realm of market or credit risk but alas, no examples or guidance on such matters are considered.

So then, should enterprise risk management encompass the measurement of credit risk or market risk or any other financial hazards for that matter and is ISO 31000 really an enterprise risk framework at all?

ISO 31000 for Market Risk
Enterprise risk management would as we expect envelope all risks that a business may endure. This would take in operational risk of course and some of the other concerns that are tangled up in the financial end of the risk spectrum.

Sure enough we have plenty of customers asking us about support for market and credit risk, so with that in mind I would assume that these are common risk concerns which need to be managed. Nevertheless, as it stands today ISO 31000 has some gaps that are pretty open and what we will do here is plug one of those gaps with a whitepaper that connects market risk directly to ISO 31000 and explicitly.

ISO 31000 for Market Risk Whitepaper [ LINK ]

This paper demonstrates how ISO 31000 can be connected to a market risk context and with relative ease, that is the good news with ISO 31000.

For the practitioner who is learning or who is not experienced in market risk, this might be a different story; they wouldn't really have a starting point on using ISO 31000 to capture market risk and a lot of additional research would be required for them.

As this is a recurring theme with ISO 31000, we are going to take to write several annexes for ISO 31000 to treat different disciplines of risk management including Risk Aggregation, Credit Risk and Stress Testing. This takes time as you can imagine and please be patient but in the meantime enjoy the white paper on ISO 31000 for market risk (version 1 draft).

A couple of pointers about this paper which the reader should keep in mind.

This paper is not intended to explore new statistical techniques for market risk, it is not trying to push the envelope for market risk quantification, nor is it trying to appeal to an expert trader who is interested in learning about valuing and executing a complex hedging strategy. This is a draft or first cut whitepaper, written in a single day that aligns ISO 31000 with market risk and being an "alpha draft", it is going to be improved upon when time prevails.

For an ISO 31000 practitioner who wants to learn about market risk, this paper is ideal and it is the first paper I know of that puts market risk into the realm of ISO 31000. Feel free to download it and enjoy.

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