Thread by @SAH16928046

Buy Vs. Sell-Side Risk Information: Time to Differentiate between “Your Risk” and “My Risk” Reports
@CFAinstitute @GARP_Risk

Report Sample of Asset Allocation Analytics

Well, we all are accustomed to reading “Buy” and “Sell-Side” Investment Evaluation Reports prepared by Financial Research Analysts at various FIs such as Investment Companies operating in the Financial Markets.

However, there seems to be very little focus on developing customized “Sell-Side” Risk Reports for clients at several Financial Institutions such as Brokerage Houses or Asset Management Firms.

The FIs don’t seem to promote this sort of risk information-sharing culture at their end.

The maximum they do is that they add a “#Risk Warning Chapter” and/ or “Legal Disclaimer” in the product/service brochure to avoid legal consequences of their actions.

In the USA, the Investment Banking and Research Divisions are separated from one another to control unethical investment recommendations and practices.

However, the SEC neither in the USA nor anywhere else argues in favour of developing exhaustive “Sell-Side” Risk Reports which would lead to full disclosure of information both at the Retail and at the Corporate Levels.

“Buy-Side” Risk Reports have been in business for a long time. Most of the firms that maintain Middle and/ or Front Office Risk Desks are also developing various kinds of reports that are used to assist both the Fund Managers and IC – Investment Committee Members.

These reports are also used by auditors to develop an “Audit-Trail” to investigate various risk recommendations that may or may not influence the overall investment decision making processes.

However, I would like to recommend to all FIs and especially Risk Managers to assist the business development side of operations by developing appropriate risk -reports for clients which may influence the outcome of the sales more transparently.

The “Risk Desk” should train the Sales Team and the Marketing Blokes to sell products and services based on risk recommendations.

However, Most of them want to, but they are not allowed to do so! that’s another tragedy that I don’t want to touch on in this thread.

So, my point of view is that very few untrained “Sales People” as FIs know how to calculate and interpret Financial Risk Information.
Hence how is it possible for them to communicate relevant findings to their Institutional or Retail (Household) Clients?

Just not possible, eh! ?? …………….. Right, it’s not!

What I argue is, that “Sell -Side” Risk Reports should come up asap in the Industry.
The basic difference between the latter and the conventional “Buy-side” Risk Reports should be in terms of addressing their audiences separately and respectively.

“Buy-Side” Risk Reports are normally made for “internal-staff” members such as Auditors, Investment Managers, Economists, Product Developers, Financial Engineers, CFO, CIO, CEO and so on etc.

The “Sell-Side” Risk Reports should meet all client risk informational requirements exhaustively.

So we ought to clearly draw a line between “MY RISK” which are the Buy-Side Risk Reports and “YOUR RISK” which are the Sell-Side Risk Reports!

“My Risk” are Financial Risks that FI interfaces and accepts at the internal decision-making level, and “Your Risk” are Financial risks that (the client) experiences as a result of a product or service sold to them via any financial institution.
Period!!!

It's just as simple as this!!

No rocket science to it…

Ostensibly, one may increase or decrease the depth of information that is added within such risk reports based on client background and interests.
You won't be normally sharing #ETL- Extreme Tail Loss Movements and #GARCH (1,1) Model Estimation Methods with your Retail Clients.

That doesn’t make sense from a Marketing Perspective, right ??? ………..

But what you would want to share are basic risk indicators such as credit ratings, basic asset volatility model assumptions, discount factors used to calculate #NPV and basic stress test forecast results etc.
The usual FRM Industry-standard stuff done in layman’s language!!

“Sell-Side” Risk Reports should ideally contain all the necessary product-specific Credit, Liquidity, Operational and Market Risk Data Outlook and Recommendations.

Such reports should be prepared solely for client education and information purposes by the relevant Risk Desk in conjunction with the Sales Team Members.

The reason why many American Bank clients lost so much money and personal assets during the recent financial crises was that they didn’t have up-to-date Product Financial Risk Outlook and Information.

Investment Banks on Wall Street such as Goldman Sachs and others were not providing full disclosure to product end-users and counter-parties! I remember how one Congressman quoted a Goldman Trader from one of the emails brought under Federal Investigation Scrutiny

during the Congressional Hearings in the aftermath of the #GFC => “That was one shitty deal we sold”
Well, that phrase says it all!
It tells you how the clients were being abused by the big banks.

Just to make matters worse, these Wall Street banks were up to something far more nefarious.

They were doing “reverse betting” against sold client positions!!

Unethical……….Terrible ………………horrible!! ;(

This all wouldn’t have been possible had “Sell -Side” Risk Reports been in business now.

It's easier for an educated client to understand the difference between “good” and “bad” volatility and ask the broker to shut up his buy-side calls during extreme market downturns!

Don’t know how Investment Banks in the US and other places were selling such high-risk deals to their customers and how they got away with it?

You may do it with a retail customer, but how they were able to fool the Institutional clients is a glaring example of Systemic Regulatory letdown.

This kind of blatant financial robbery and debauchery didn’t stop and strip there and then!

Even most of these Investment Banks and Hedge Funds that were selling/trading Credit Derivatives, and “God” knows what other Exotic Derivatives, were able to further hedge and roll over their positions by buying protection from other financial market firms such as #AIG Financial

(subsidiary of AIG) and similar Insurance firms in the USA. Thereby creating a Global Systemic Risk and Financial Contagion, as seen during the Global Credit Crises back in FY 2007!

Similarly in the UK, some British Banks and their Investment arms were busy doing “Financial-Engineering” using American Sub Prime Mortgage underlying asset as Hot Deals. The returns were fantastic, and so were the bonuses for the fund managers.

In the end, you know what happened.

Everything and anything sold!

The “Toxic- Mortgage-Backed Security” Financial Services Industry made $$$ money in trading like anything. You couldn’t have earned a higher “Alpha” in the “CITY” or on the “Wall Street” doing anything else.

All the traders had to do was to Package High-Risk Securitized Loans / Mortgages together as a portfolio of investments and enjoy the short term abnormal yields/profits.

So going back to the basic argument!

Had the banks and other financial industry firms been able to abuse themselves, their clients and other countless counter-parties (including regulatory agents), if there had been some kind of “Sell -Side” Risk Reports circulating in the Industry?

Definitely, the word would have gone out and caused great embarrassment! the “CASINO ECONOMY” ought to have busted much earlier. But unfortunately, there was no such widespread practice to prepare “client level” Sell-Side- Risk Information / Full Disclosure Reports,

As evidence and events suggest to us.
Yes, they were “Buy-Side” Risk Reports, which were prepared for BRMC – (Board Risk Management Committee) Members, Fund Manager and/ or Traders in the Front Offices.

But of course, that didn’t help to create any kind of “risk awareness” at the appropriate levels!!

So I believe the time has come for the industry to develop more customer-focused Sale-Side “Your Risk Reports” and effectively impart Risk Management knowledge through Training Programs to those Sales Team Members,

who is in charge of selling the business of Financial Risks to both Retail and Institutional Level Clients across Global Financial Markets?

Your feedback is always welcomed!

#GFC #Derivatives #CDS #AIG #CMOs #MBS #Prepayment #VaR #MCS #Risk #Bank #City #Basel2 #Economiccapital #ERM #FRM #QRM #Statistics #Analytics #Metrics #Informatics #Dashboard #Econophysics

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