1. EF5603
The Career of
Financial Risk Management
Professionals
Dr. LAM Yat-fai (林日辉博士)
Doctor of Business Administration (Finance)
CFA, CAIA, FRM, PRM, MCSE, MCNE
PRMIA Award of Merit 2005
E-mail: quanrisk@gmail.com
Copyright 2015 LAM Yat-fai
2:00 pm to 3:15 pm
Saturday 1
November 2014
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Outline
Financial risk management (“FRM”)
Job market of FRM
Education and training
Professional requirements
Basel Committee’s
classification of financial risks
Major financial risks
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Market risk
Currencies
Debts
Equities
Commodities
Credit risk
Operational risk
Other financial risks
Liquidity risk
Reputation risk
Legal risk
Strategic risk
Financial risk management
Financial risk
management
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Risk
identification
Risk
measurement
Risk
monitoring
Risk
mitigation
2. Market risk identification
for single equity
Risk factor Abbreviation Impact to market risk
S + 0 Equity price
No. of shares n +
Volatility σ +
Holding period T +
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Market risk measurement
for single equity
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Value-at-risk
95% 0 VaR ≈ 1.645nS σ T
Market risk monitoring
for single equity
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Market risk mitigation
for single equity
Control Risk factor Impact to market risk
S - 0 Derivative
Disposal n -
Derivative σ -
Early termination T -
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4. Demand of FRM professionals
Credit risk Market risk Operational risk
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Postgraduate FRM education at
business schools in Hong Kong
Market risk Credit risk Op risk
HKU *** *
CUHK *** *
HKUST ***
PolyU ***
CityU *** * *
HKBU ***
LNU *** *
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Elective courses for FRM at CityU
Technical courses
EF5340 Credit Risk Management
EF5083 Operational Risk Management for
Financial Institutions
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General courses
EF5064 Auditing and Control for Financial
Institutions
EF5343 Corporate Risk Management Policies
Good books for
market risk management
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5. Good books for
credit risk management
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Good books for
operational risk management
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Certified FRM by GAAP
Pass two parts of four-hour exams
Normally one year to complete
Minimum half year to complete
Two years of recognized working experience
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FRM exam – Part I
Exam twice a year – May and November
Fundamental topics in financial risk
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management
Four-hour exam in the morning
100 multiple choice questions
Relatively simple and straight forward
Should pass with reasonable preparation
(around 200 to 250 effective hours)
6. FRM exam – Part I
Foundations of risk management (20%)
Quantitative analysis (20%)
Financial markets and products (30%)
Valuation and risk models (30%)
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FRM exam – Part II
Exam twice a year – May and November
Professional topics in financial risk
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management
Four-hour exam in the afternoon
80 multiple choice questions
To pass with reasonable preparation (around
250 to 300 effective hours)
FRM exam – Part II
Market risk measurement and management (25%)
Credit risk measurement and management (25%)
Operational and integrated risk management (25%)
Risk management and investment management
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(15%)
Current issues in financial markets (10%)
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7. FRM exams passing rates
Part I Part II
Average 48.6% 57.4%
Standard deviation 4.8% 2.7%
Coef. of variation 0.0996 0.0471
Nov 2013 50.9% 58.0%
May 2013 45.9% 56.8%
Nov 2012 46.7% 56.0%
May 2012 47.3% 61.1 %
Nov 2011 46.6 % 57.0 %
May 2011 53.1 % 61.5 %
Nov 2010 39.3 % 54.9 %
May 2010 52.5 % 54.0 %
Nov 2009 55.2 %
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Basel III framework
Basel III
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Minimum
capital
requirements
Public
disclosure
Supervisory
review
process
Liquidity
sufficiency
Basel II
Minimum capital requirements
Minimum capital
requirements
Credit risk Operational risk
Standardized
method
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Debt
exposures
Securitization
exposures
Basic approach
Standardized
approach*
Advanced
measurement
approach*
Market risk
Internal model
method*
Standardized
approach
Internal ratings
based approach*
Standardized
approach
Ratings based
approach*
Supervisory formula
approach*
* Regulatory approval required
Supervisory review process
A bank should have a process in place to assess its overall capital
adequacy in relation to its risk profile and a strategy to maintain its level
of capital
A regulator should review and evaluate a bank’s internal capital adequacy
assessments and strategies, as well as the bank’s ability to monitor and
ensure compliance with capital sufficiency. A regulator should take
appropriate supervisory action if it is not satisfied with the result of a
bank’s process
A regulator should expect a bank to operate above the minimum
regulatory capital sufficiency and should be able to request a bank to hold
additional regulatory capital
A regulator should seek to intervene at an early stage to prevent a bank’s
regulatory capital from falling below the minimum levels and mandate a
bank to take rapid remedial action if the regulatory capital is not
maintained or restored
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8. Public disclosure
The organization structure of a banking group, the entities to which the
Basel III framework is applicable and the entities to which the Basel III
framework is irrelevant
The terms and conditions of the major features of the financial
instruments which are qualified as regulatory capital
The list of financial instruments qualified as common equity and
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additional tier one capitals
The total amount of tier two capital
The capital charges arising from the credit, market and operational risks
General information of other risks to which a bank is exposed and the
relevant methods that the bank has applied in managing these risks
The structure and operations of the bank’s risk management function
Liquidity sufficiency
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Liquidity ratio
Liquidity coverage ratio
Net stable funding ratio
Supervisory monitoring tool
Contractual maturity mis-match
Concentration of funding
Available unencumbered assets
Financial market monitoring tools
Job requirements of FRM
Academic qualification
Professional qualification
Specialist knowledge
Basel III framework
Working experience
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Make a difference
I have taken a number of FRM related
electives during my MSc programme study
I plan to complete the certified FRM exams
in the coming year
I like to participate in the bank’s Basel III
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implementation
