Annual Report 2005 - Fields Institute - University of Toronto

Lowell Aronoff (Cannex Financial Exchanges)
An exchange for the Canadian and US payout annuity markets
Garth Bernard (MetLife)
Successful product innovation: taking concepts to market
Paul Kaplan (Morningstar, Inc.)
Asset allocation with annuities for retirement income management
PRMIA Risk Management Seminars
November 2004 – June 2005
Held at the Fields Institute and the Rotman School of Management
Organizers: Dan Rosen (Algorithmics) and Luis Seco (Toronto)
The Fields Institute hosts two regular seminars with strong
participation from the business community. The Quantitative
Finance seminar has been in place for over ten years.
It has a primarily academic focus, and draws its audience
from groups ranging from mathematics and business
faculty to financial professionals. New in 2003-2004 was
the PRMIA Risk Management seminar, which focuses more
closely on the needs of practitioners. It built on that success
with the 2004-2005 seminar, which regularly left the Fields
lecture hall with standing room only. The seminar is organized
by Dan Rosen (Algorithmics) and Luis Seco (Risklab,
Sigma Analysis, and the University of Toronto), who are
both officers of the Toronto chapter of PRMIA – the Professional
Risk Managers’ International Association. PRMIA
is a nonprofit professional association that organizes risk
management events and certification programs around the
world.
In November, the risk management seminar heard a panel
discuss the 2002 Sarbanes-Oxley act (SOX 404), and its
implications for risk management. SOX 404 is a reaction
to the Enron and WorldCom scandals, and imposes legal
obligations on CEOs and CFOs of US corporations to
implement, test, and certify internal financial controls.
Risk management enters into all three stages of this process,
and the audience heard about the experience of various corporations
with this. Building the necessary infrastructure is
proving to be more complicated and costly than predicted,
even though Canada will likely not adopt similar rules until
2006.
C o m m e r c i a l / I n d u s t r i a l M a t h e m a t i c s
Jim McGovern, Ron Mock, Luis Seco, Bill Fung and Dan Rosen
In February the seminar moved to the atrium of the Rotman
School, where several hundred participants heard a
presentation sponsored by SunGard Trading and Risk. John
Hull (Rotman) discussed the structure of Collateralized
Debt Obligations, in which a portfolio of debt obligations
are combined and sold in tranches as a number of individual
securities. He described the modeling and pricing
of these CDO’s, and indicated how Gaussian copulas have
emerged as the standard for modeling the codependence
of default events in portfolios or baskets credit derivatives.
Following Hull’s talk, a panel of discussants spoke about
the evolution of the market for these products, and commented
on a variety of associated risk factors.
Suzanne Labarge, who recently retired as Vice-Chair
and Chief Risk Officer at RBC financial group, gave the
audience at Fields her perspective on the evolution of
risk management, at a seminar in March. She described
the market’s increasing intolerance of poor risk management.
This has led to better defined structures through
which firms manage risk, among them the creation and
recognition of such positions as Chief Risk Officer. Vanilla
lending is no longer central – instead structured or illiquid
products and international agreements such as Basel II have
made risk management a key aspect of the operation of any
modern bank.
The seminar concluded in June, with a pair of talks on
alternative investments, such as hedge funds. Ron Mock
(Ontario Teachers’ Pension Plan) described the perspective
of a practitioner, picking and choosing among a variety
of alternative investments. The goal is to buy alpha – or a
return uncorrelated with the rest of the market. He indicated
some of the many pitfalls this entails, including the
Fields Institute 2005 ANNUAL REPORT 109