Impact of EPS: Identifying gaps in implementation and satisfying the regulators

Impact of EPS: Identifying gaps in implementation and satisfying the regulators

Ahead of the Liquidity Risk Management Congress, we interviewed Ji Qin, Director, Head of Market Risk, MUFG Securities Americas Inc.
Ji, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I started my career in technology supporting risk, when risk was a very small group in the bank. We were one of the first clients of Riskmetrics after they were spun off JP Morgan. Now a large bank’s risk department size has increased several folds. I moved from technology to risk shortly and also worked in FIC trading and structured investment for a few years. It gave me a very precious perspective of how an organization functions with different groups, so I was able to connect a lot of dots.
As head of the market risk group for the broker dealer arm of MUFG America, my main focus is market, liquidity, and interest rate risk on the broker dealer. And the liquidity risk has a bigger focus this year.

At the Liquidity Risk Management Congress, you will be speaking on your insight regarding – The impact of EPS a year on. Why do you believe this is a key talking point in the industry right now and what can risk professionals gain from this insight?

The requirement for Liquidity risk is much more detailed than market risk and interest rate risk. With the first horizontal review of CLR on FBOs last year, liquidity risk has been a key talking point. There are certain areas from EPS that require interpretation and there is a lack of industry standard surrounding: Independent review function and first line vs second line responsibilities. By sharing these insights, hopefully this type of conference can help move liquidity risk management framework towards a more standardized practice.

In your experience, how can financial institutions best manage the impact on liquidity buffers and cash flow projections?

It is important to have a stress testing framework that has enough granularity on product level, especially with the hidden optionality embedded in some products. It is also essential to have a proper FTP framework, so that the pricing of these products is properly reflected in the contingent cost; this will steer business towards a more sustained strategy.

In your opinion, how has EPS developed year on year?

EPS as a rule hasn’t been amended, the impact on FBOs still carries on. CLR reviews can enforce certain areas’ implementation.

Can you give a brief overview of CLR assumptions and documentation?

The stress scenario design drives all other assumptions. Most firms still focus on three scenarios: Market wide stress, idiosyncratic stress specific to one’s firm, and a combined event of both. The stress scenarios should not be a simple repeat of a historical stress. It should tailor to firm’s specific weak point and also include forward looking element. The documentation should include supporting data/analysis for deriving various assumptions.

What, in your opinion are the upcoming key challenges within the liquidity risk landscape?

The demand for liquidity risk professionals has grown tremendously in the past ten years. I think for many firms, the number has grown more than tenfold. And there are still many unfilled openings, including my firm. An important skillset for a liquidity risk professionals, is to have a broad understanding of the market and the ability to link this knowledge to specific product behaviours. And an intellectual curiosity is always a good trait for a liquidity risk manager as we live in a dynamic market and ever-evolving regulatory environment.