During Global Association of Risk Processionals (GARP) 16th Annual Risk Management Conference in New York, Mark Flannery, Director, Division of Economic and Risk Analysis, U.S. Securities and Exchange Commission delivered a keynote address. Below are a few highlights from his speech:
- One key challenge in the industry is how to effectively disclose risks to investors
- Mark stated that there are some concerns around systemic risk – flow from correlated activities. Danger that risks will propagate and effect external entities; potential for knock-on effects on several firms. The Division of Economic and Risk Analysis (DERA) incorporates this risk into policies around OTC derivatives, use of asset-backed securities and appropriate trading activities
- To address concerns around market risk conduct, DERA looked at inappropriate managerial approvals – to determine in accounting looks funny, observed unusual inventory build-up and flagged suspicious activity that resulted in a deeper dive to check for any accrual behavior or misreporting
- Within DERA, a cross-agency fraud task force provides a dashboard to allow comparisons to be made during reviews
- DERA also has a broker dealer assessment program – analytical tool used in conjunction with examinations to help prioritize inspections. Provides onsite examiners a hint of where to look – mining the data in an intuitive way to generate information to let examiners schedule visits and provide insights as to what to look for
- Market wide risks – threaten financial systems stability. The Office of Financial Research (OFR) looks for possible negative effects that arise from interaction from market participants. Previously used to focus on dominos (one firm fails and causes others to fail); now being more proactive. Mark stated that “We can’t do what we do without having good data. Data and usable data are two different things”. DERA takes info that is provided and makes it usable (Office of Structured Data) – XBRL, integrating data sets, etc.
- Mark concluded by saying that the SEC cannot be an effective supervisor unless it understands risks facing individual investors and systemic risks.
KSENIYA (KATE) STRACHNYI is an advisory consultant focused on risk management, governance, and regulatory response solutions for financial services institutions. Areas of expertise include governance frameworks, enterprise risk management programs, ICAAP, compliance risk management, operational risk management, Foreign Enhanced Prudential Standards, Basel II/III, and the Dodd-Frank Act.