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  • Fed Sets Capital Levels for Large Banks / PwC's AI Survey Insights / Regulatory Fines from CFTC & FINRA

Fed Sets Capital Levels for Large Banks / PwC's AI Survey Insights / Regulatory Fines from CFTC & FINRA

PLUS: The Hottest Hedge Funds Speak on How They Really Manage Risk

Author

Naeem Qasim
August 30, 2024

Hello everyone! Here is what we have in this week’s Risk Queue!

-Thank you, Naeem, CEO & Founder - Risk On Q

PICKS:

  1. AI Risk - PwC AI survey sheds key insights

  2. Regulatory Fines - Payouts by Bank of America & NASDAQ

  3. Audit - EY’s change to audit strategy

Risk Headlines

Key Points:

The Fed has set new capital cushions for large banks, effective Oct. 1. This is crucial for risk management and maintaining financial stability. The Fed also lowered Goldman Sachs' stress capital buffer from 6.4% to 6.2%. This highlights the importance of engaging with regulators and providing additional information when necessary. The Fed's willingness to adjust its findings based on new information demonstrates some flexibility in the regulatory process. The Fed will also consider refining its data collection and stress test models, which could impact future capital requirements and stress testing procedures.


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Key Points:

EY's significant shift in audit strategy to improve audit quality through client reduction and substantial investments in technology and methodology. This transformation is occurring against a backdrop of increased PCAOB’s regulatory scrutiny and shifting competitive dynamics among the Big Four accounting firms.  For the broader business community, this could mean more rigorous audits, potentially higher costs, but also greater reliability in financial reporting.

A.I. Risk / Technology Risk

Key Points:

The PwC survey provides insights on AI adoption for firms the importance of AI in business strategies, with a focus on Responsible AI (RAI) practices as a means to manage risks and achieve competitive differentiation. It highlights the challenges in quantifying the value of RAI, which necessitates the development of comprehensive frameworks for risk assessment and management. The need for clear ownership and coordination across departments is emphasized to ensure that AI initiatives align with business objectives and risk management strategies. The potential implications include enhanced competitiveness, improved stakeholder trust, and better preparedness for future regulatory requirements.

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Key Points:

McKinsey underscores the critical importance of a proactive, strategic approach to cybersecurity in today's rapidly evolving digital landscape. It emphasizes the need for organizations to move beyond basic security measures to develop comprehensive, risk-based cybersecurity strategies that are fully integrated with business objectives. Focus on:

  • Regulatory compliance and board-level involvement in cybersecurity

  • Risk-based prioritization of cybersecurity efforts

  • Comprehensive understanding and management of the organization's digital ecosystem

  • Proactive preparation for potential cyber incidents

Regulatory News - Fines, Losses, & Rules

Key Points:

The CFTC's action against Nasdaq Futures, Inc. reveals significant failures in regulatory compliance, transparency, and communication. The $22 million fine underscores the severity of these violations and sets a strong precedent for the industry. The undisclosed volume-based incentives raise concerns about market integrity and fair competition, while the false statements to the CFTC highlight a troubling breakdown in the relationship between the exchange and its regulator.  The violations of DCM Core Principles suggest that regulatory bodies may increase their scrutiny of exchanges and potentially implement stricter oversight measures.

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Key Points:

The extended period of these violations, dating back to 2015 for Merrill Lynch, suggests a systemic issue rather than an isolated incident. Perhaps most concerning is the volume of unreviewed alerts – approximately 1,155 representing 125,700 potentially manipulative trades. It suggests not only technology shortcomings but also operational and possibly cultural issues within these organizations.

The six-month remediation deadline imposed by regulators indicates the urgency of addressing these issues. However, given the complexity and long-standing nature of the problems, this timeline may prove challenging.

Risk Data to Geek Out On

Key Points:

Listen to the latest deep dive exploring the cutting-edge world of multi-strategy hedge funds, colloquially known as "pod shops" - Wall Street's current golden child. These funds are revolutionizing capital deployment and risk management, but how do they actually navigate the complex web of financial risks?

Rich Falk-Wallace, a Citadel alumnus and current CEO of Arcana, sat down with Bloomberg to unravel the mysteries of risk management in these sophisticated operations. The discussion covered:

  1. The impact of advanced risk models on investor behavior and broader market dynamics

  2. The creative process behind multi-strat traders' strategies

  3. Critical factors in position sizing and evaluation

This insider's perspective offers valuable insights into the future of risk management in high-stakes financial environments. Don't miss out on understanding how these trend-setters are reshaping the landscape of financial risk.

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Thank you for reading,

Naeem

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