CCMS Governance and Risk Management
CCMS Governance and Risk Management
CCMS Governance and Risk Management
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October 2005<br />
<strong>Governance</strong> <strong>and</strong> <strong>Risk</strong> <strong>Management</strong> Structures<br />
for Fund <strong>Management</strong><br />
Caribbean Center for Monetary Studies<br />
11 th Annual Senior Policy Level Seminar<br />
May 25, 2007<br />
Port of Spain, Trinidad <strong>and</strong> Tobago<br />
Sudhir Rajkumar<br />
Head, Pension Investment Partnerships<br />
World Bank Treasury<br />
srajkumar@worldbank.org<br />
tel: (202) 473-0799<br />
treasury.worldbank.org
Investment Framework<br />
Accounting &<br />
Reporting<br />
Performance<br />
Measurement<br />
Governing<br />
Board<br />
Information<br />
Technology<br />
<strong>Risk</strong><br />
<strong>Management</strong><br />
Investment<br />
Policy<br />
Investment<br />
<strong>Management</strong><br />
October 2005<br />
2
Guiding Principles<br />
Every Fund has a unique risk profile based on:<br />
the liability characteristics of the Fund; <strong>and</strong><br />
the size of the Fund relative to its liabilities;<br />
October 2005<br />
Good governance = Clear separation of roles <strong>and</strong> accountabilities;<br />
Board should “own” the Fund’s risk profile (both SAA & <strong>Risk</strong> Budget);<br />
Policy decisions need to be clearly articulated <strong>and</strong> documented;<br />
<strong>Risk</strong> usage <strong>and</strong> return should be monitored <strong>and</strong> reported regularly;<br />
Structural changes may require a review of Investment Policy (e.g.<br />
availability of new asset classes, demographic profile of beneficiaries,<br />
cash-flow needs, capacity of domestic markets, ability to hedge<br />
currency risk).<br />
3
Organizational Structure<br />
Internal Audit<br />
Periodic review<br />
of processes <strong>and</strong><br />
procedures<br />
Accounting &<br />
Valuations<br />
Pricing<br />
Accounting<br />
Reconciliation<br />
Controller<br />
Financial Statements<br />
Internal Control<br />
Environment<br />
Settlement &<br />
Control<br />
Bank balances<br />
Trade settlement<br />
Operational risk<br />
measurement<br />
Governing Board<br />
Investment Policy<br />
Overall <strong>Risk</strong> Budget<br />
Oversight<br />
<strong>Risk</strong> &<br />
Analytics<br />
<strong>Risk</strong><br />
Benchmarks<br />
Performance<br />
Investment Committee<br />
Investment Guidelines<br />
<strong>Risk</strong> Allocation<br />
External vs In-house Mgmt.<br />
October 2005<br />
Legal Counsel<br />
Investment<br />
<strong>Management</strong><br />
In-house Mgmt.<br />
Mgmt. of Ext.<br />
Managers<br />
Active risk Mgmt.<br />
4
Investment Policy: Roles<br />
GOVERNING BOARD<br />
INVESTMENT<br />
COMMITTEE<br />
Staff<br />
Approves Investment Policy: Fund<br />
Objectives, Investment Horizon,<br />
<strong>Risk</strong> Tolerance & Metrics, Eligible<br />
Asset Classes, SAA<br />
Sets Investment Guidelines &<br />
Policy Benchmark, <strong>Risk</strong> Budget<br />
For TAA or Active <strong>Risk</strong><br />
Implements Investment Policy <strong>and</strong><br />
Allocate <strong>Risk</strong> to portfolio managers<br />
And to TAA within overall Budget<br />
October 2005<br />
5
Translating <strong>Risk</strong> Tolerance into Metrics<br />
Avoid low funded ratios<br />
(Staff <strong>and</strong> Retirees’<br />
Objective)<br />
The minimum<br />
funded ratio * is 85%<br />
Maximize Return<br />
(max. wealth of Fund)<br />
October 2005<br />
The maximum<br />
contribution rate * is 22%<br />
Avoid high<br />
contributions<br />
(Plan Sponsor’s<br />
Objective)<br />
* There is a 5% probability that these levels are exceeded in the next year.
Optimal Portfolios for Different Investors<br />
October 2005<br />
Efficient frontier: set of portfolios which have the highest possible<br />
expected total return for a given risk level.
In-house <strong>Management</strong> versus<br />
External Managers<br />
External Asset<br />
<strong>Management</strong><br />
October 2005<br />
Benchmark for Internal <strong>Management</strong><br />
Skills & Technology Sharing<br />
Enhancing <strong>Risk</strong>-Adjusted Returns<br />
Access to Resource Intensive<br />
Investment Strategies/Asset Classes<br />
Reduce Staff Turnover <strong>Risk</strong><br />
Reduce Cost
IT Systems <strong>and</strong> Data Flows –<br />
In-house <strong>Management</strong><br />
Trade<br />
Entry<br />
Front Office<br />
Middle Office<br />
Back Office<br />
External<br />
Market<br />
Data<br />
Middle-<br />
Ware<br />
Pricing<br />
Portfolio<br />
Mgmt<br />
System<br />
Settlement<br />
Accounting<br />
World Bank<br />
G/L<br />
Payment<br />
…suitable for high volume – high risk<br />
Benchmark<br />
Data<br />
Warehouse<br />
Performance<br />
October 2005<br />
<strong>Risk</strong> & Compliance<br />
SWIFT<br />
Mgmt<br />
Reporting
Types of <strong>Risk</strong><br />
<strong>Risk</strong> can be deployed in one of two ways:<br />
Strategic asset allocation<br />
Active risk taking<br />
E<br />
x<br />
p<br />
e<br />
c<br />
t<br />
e<br />
d<br />
r<br />
e<br />
t<br />
u<br />
r<br />
n<br />
(µ)<br />
Active <strong>Risk</strong><br />
SAA<br />
<strong>Risk</strong> (σ)<br />
October 2005
Different Accountabilities for Different <strong>Risk</strong>s<br />
Strategic Asset Allocation<br />
Benchmark: Liabilities<br />
Total Plan Investments<br />
Tactical Asset Allocation<br />
1. TAA Across Asset Classes<br />
Benchmark: SAA weights<br />
2. TAA Within Asset Classes<br />
Benchmark: SAA benchmarks<br />
3. Misfit/Benchmark <strong>Risk</strong><br />
Active <strong>Management</strong><br />
Benchmark:<br />
October 2005<br />
Manager Selection<br />
Manager benchmarks
Role of a Custodian<br />
Performance<br />
reporting<br />
& Compliance check<br />
<strong>Risk</strong> & Return<br />
analysis<br />
Value Added functions<br />
Core functions<br />
Settlement & Safekeeping<br />
Portfolio Accounting & Reporting<br />
Benefit payment<br />
Cash<br />
management<br />
Tax<br />
reclamation<br />
Securities<br />
lending<br />
October 2005
Custodian: Core Functions<br />
Settlement <strong>and</strong> Safekeeping<br />
— Trade settlement<br />
— Asset delivery<br />
— Safekeeping of assets<br />
Portfolio Accounting <strong>and</strong> Reporting<br />
— Portfolio accounting <strong>and</strong> consolidated reporting<br />
— Dividend & Interest income collection<br />
— Asset valuation / Security pricing<br />
— Corporate action processing<br />
— Administrative support<br />
October 2005
Reporting Content <strong>and</strong> Frequency<br />
Governing Board: Quarterly<br />
ν Size/Composition ν Performance<br />
ν <strong>Risk</strong><br />
Investment Committee: Monthly<br />
ν Size/Composition ν <strong>Risk</strong> ν Performance<br />
Department Manager: Daily<br />
ν Size/Composition ν <strong>Risk</strong> ν Performance ν Limit violations<br />
Portfolio Managers: Daily sub-portfolio level<br />
ν Cash position ν Holdings ν <strong>Risk</strong> ν Performance ν Limit violations<br />
October 2005<br />
19
Investment Framework<br />
Accounting &<br />
Reporting<br />
Performance<br />
Measurement<br />
Governing<br />
Board<br />
Information<br />
Technology<br />
<strong>Risk</strong><br />
<strong>Management</strong><br />
Investment<br />
Policy<br />
Investment<br />
<strong>Management</strong><br />
October 2005<br />
20
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