Group proposes chief risk officer for markets

A systemic risk regulator should act as the chief risk officer responsible for overall U.S. financial markets, according to a survey published by a financial markets trade association on Monday.

Lawmakers, trying to reach a compromise on financial regulation aimed at preventing a repeat of the global economic crisis, are considering forming a systemic risk council.

Anticipating legislation, accounting firm Deloitte and the Securities Industry and Financial Markets Association surveyed 22 organizations, including banks, insurers, hedge funds, exchanges and regulators.

These institutions identified broad factors such as firm size, liquidity, leverage and correlation that contribute to systemic risk.

Regardless of the form the regulator takes, it should cover systemically important financial institutions, markets and underlying risks, according to the study.

The study covered eight different approaches to monitoring systemic risk. These included stress tests, analyzing risk sensitivities and reporting concentration exposures within institutions and markets. The study then discussed the costs of such strategies and their effectiveness, as well as assessing the information a systemic risk regulator might need to effectively monitor markets.

Survey participants agreed that more transparency is needed on over-the-counter derivatives and that the industry must improve monitoring of leverage and risk concentrations.

Bills from the U.S. Senate and House of Representatives have proposed establishing a council of regulators chaired by the U.S. Treasury to monitor the financial big picture and to spot and head off the next crisis.

Last week negotiators began hammering out details to create such a council, along with tackling other proposals from the two competing bills aimed at overhauling financial regulation.

[Source: Reuters, New York, 14Jun10]

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