HouAshford W. Meikle, Staff Reporter
AS JAMAICA'S leading investment institution, Jamaica Money Market Brokers Limited (JMMB) takes risk management seriously. JMMB has invested heavily in resources to strengthen its risk management practices, arguing "a risk conscious culture is the foundation for [the company's] risk management practices."
JMMB has an asset managemant base of $7.1 billion and and an accounting capital of $6.1 billion.
On Friday, the comapny organised one-day risk management seminar at the Knutsford Court Hotel which saw presenters drawn from a number of credit ratings and consulting firms in the Caribbean, Jamaica and the United States.
The person responsible for leading JMMB's risk management team is its Risk Manager, Aaron Hou, who was hired in 2003, shortly after the liquidity crisis in Jamaica. A chartered financial analyst and a certified Financial Risk Manager (by the Global Association of Risk Professionals), Mr. Hou is a graduate of Shanghai International Studies University and New York University's Baruch College.
As well as being an adjunct professor at Baruch College, Mr. Hou has worked with the Bank of China, Raymond James Financial Associates and Morgan Stanley Dean Witter.
Recently Sunday Business sat down with Mr. Hou to discuss the concept and practice of risk management.
Sunday Business: Tell us about your function at JMMB.
Aaron Hou: I have a team of six persons and we oversee the financial risk management of JMMB. Financial risk management consists of the ... risks arising from the trading in financial management. That includes market risk, liquidity risk and credit risk.
SB: How important is risk management to JMMB?
AH: Very, very important. I think risk management is crucial for the survival and prosperity of any financial institution insurance company, bank, and securities dealer. At JMMB we always do [and insist upon] the stress test - the what if, the extreme. For example [in the case of an insurance company], what if you have a hurricane ... an earthquake.
At JMMB we want to be an international investment firm. We are based in Jamaica ... but we have our mission to become an important player in the world. This is why we have taken the initiative to develop a strategic risk management team in house because we want ... to be conscious about risk. We have a culture of risk awareness. We talk about risk all the time.
SB: Is risk management lacking among Jamaican financial institutions?
AH: I think risk management is going to become more and more important to Jamaica and the Caribbean ... and all emerging markets.
That's why, at JMMB, we want to be of international standards ... Risk is crucial to us. Our practice far exceeds the regulators' [such as BOJ and the Financial Services Commission]. And we want to increase investor confidence. The investor asks, 'how do you manage my money, how do you manage my money?'
SB: Balancing risk and reward is critical to maintaining profits and reputations as well as operational independence. How does JMMB achieve this balance?
AH: JMMB is very conscious about risk management. The mission of our risk team is not risk elimination, but risk management. Therefore, there are no conflicts between sound risk management and profitability. We ensure we understand our risk and we have sufficient capital to support our business activities. That will also ensure our reputation would not be put at risk anytime
SB: How different do you regard the risks facing securities dealers such as JMMB compared with the commercial banks?
AH: There are no significant difference regarding the risk exposures between banking sectors side and securities dealers' side. Both sectors have significant exposures to GOJ securities.
SB: GARP came out of developed countries such as the U.S. Emerging markets such as Jamaica have risks which hardly exist in the developed economies. Can you outline the key differences, in the process explaining the critical risks in Jamaica?
AH: In my opinion, there are some difference between emerging market and developed market. One key difference is the market liquidity. The fund flow in Jamaica certainly is much lower than that in New York and Hong Kong, it is more likely to have a liquidity crunch, especially under the "capital flight" scenario that happened in Argentina and Dominican Republic in the last few years. Another difference is the market transparency. We all know that the market would be volatile when it is full of uncertainty. The public regulation should make the monetary policy more transparent to the private sector.
The private sector should provide on time, reliable information to the investors. Higher marker transparency would increase the investors' confidence and make the capital market more resilient to external shocks. The last one is the risk management standard. Risk professionals in Jamaica are eager to increase the standard of risk management. We admit that there is a gap between our practice and the practices in the developed market. As we enhance our standard, we can measure and manage our risk in a better way.
SB: In terms of your checks and balances, for foreign securities (such as leveraged mortgage notes) sold by international brokers how do you analyse these difficult to value securities on a market to market basis assuming you already or will buy some?
AH: There are some untraditional structure finance securities in Jamaica market such as credit link notes, mortgage notes, range notes etc.. These exotic securities require special risk analysis. In JMMB, we developed internal models to conduct proper analysis.
SB: In emerging economies, bankers often cannot rely on the implicit guarantee of efficient supervision and probable bailout or rescue of banks in difficulty, which is common in developed countries. Is this true in Jamaica in your opinion?
AH: I don't see there is implicit guarantee of bailout from my regulators and I don't believe we should have one in Jamaica. It would only encourage the bankers to take extra risk when they know that there is no downside risk, since the government will bail them out anyway. It is called "Moral Hazard" phenomenon in the developed world. I believe the government should lay out the platform for the private banking sector, ensure the systematic risk is low and leave the bankers to manage their own business risk. The market would reward the bankers with sound risk management practices and fail those without.
