MF Global March 2011: "We're not taking enough risk"

Discussion in 'Wall St. News' started by buzzy2, Nov 1, 2011.


    MF Global looks to take more risk

    Original headline: "We're not taking enough risk"

    Author: Alexander Campbell

    Source: Risk magazine | 31 Mar 2011

    Categories: Risk Management

    Topics: MF Global, Basel III, Dodd-Frank Act, Proprietary trading
    Michael Stockman

    Michael Stockman, chief risk officer at MF Global, talks to Alexander Campbell

    MF Global is one of a number of broker-dealers and boutique investment banks that see plenty of opportunity in the world being created by the Dodd-Frank Act and Basel III. While the larger banking groups are shedding risk from their balance sheets in light of increased capital charges, as well as pulling back from certain business lines – in particular, proprietary trading – these smaller institutions are beefing up their operations.

    MF Global has been fairly explicit in its intentions. When taking over at the helm in March 2010, former Goldman Sachs chief executive and chairman Jon Corzine announced his plan to change the company from a relatively specialised derivatives broker to a full-blown investment bank. A series of high-profile appointments have followed, including Munir Javeri, who will set up and lead MF Global’s new prop trading division, and ex-UBS risk manager Michael Stockman, who joined earlier this year as chief risk officer.

    Stockman will be looking to do something few other risk managers have been doing in recent years – take more risk. “We are going to be actively and aggressively seeking to take risks in a broad fashion. In our client-facing businesses – this is no surprise as we build out – I would suggest we are not taking enough risk,” says Stockman.

    MF Global remains small in comparison with many other investment banks – it had just $42.5 billion in total assets at the end of 2010, down from $51 billion at the end of March 2010. But Stockman says there is room for rapid growth as the larger banks cut back. “The larger firms de-risking and shedding proprietary operations is an opportunity for us to fill that space – picking up either those who aren’t being served, or trading or market talent that may be coming from those highly experienced shops,” he says.

    The main challenge will be ensuring the risk management is able to keep up with the expansion plans – but Stockman says this is well understood. “If there is a relevant risk, we will have a relevant measure and limits around that risk.”

    Along with the use of common risk management tools such as value-at-risk and stress testing, risk managers need to ask more fundamental questions, he says. “The question you need to ask yourself is: have business and market conditions changed relative to how you placed limits or strategically approached a business? It sounds like a very basic question but it’s never asked often enough. And it should lead you to ask if your old assumptions have been objectively evaluated. Has your business model drifted such that the explanation for why you are in a business is ‘well, our competitors are deep into it and we need to keep up’ – which is generally not a good answer.”

    The financial crisis also highlighted there wasn’t enough discussion of the risks posed by bubbles – either internally or in industry forums, he adds. “This wasn’t the first time borrowers and lenders did not talk to each other and ended up creating a crisis.” Risk managers should “build a framework of discussion panels or forums – whether at their firms or collectively under a regulatory arrangement – that visit just these issues and do the best they can to determine whether they should carry on with these activities or not”, says Stockman.

    Biography – Michael Stockman
    January 2011: chief risk officer, MF Global
    2008–2011: head of risk management and capital markets advisory, CQ Solutions
    2008: managing director, fixed income, UBS
    1995–2007: various posts at UBS, including chief risk officer for the Americas and deputy global head of risk
  2. hmm, let's see what happened at UBS a few years ago...