Embora o gerenciamento de portfólio não tenha mudado muito durante os 40 anos após os trabalhos seminais de Markowitz e Sharpe, o desenvolvimento de técnicas de orçamentação de risco marcou um marco importante no aprofundamento da relação entre risco e gerenciamento de ativos. A paridade de risco tornou-se um modelo financeiro popular de investimento após a crise financeira global em 2008. Hoje, os fundos de pensão e os investidores institucionais estão usando essa abordagem no desenvolvimento da indexação inteligente e a redefinição das políticas de investimento de longo prazo. Introdução à Paridade de Risco e Orçamentação fornece um tratamento atualizado desse método alternativo para a otimização de Markowitz. Ele constrói exposição financeira em ações e commodities, considera o risco de crédito na gestão de carteiras de títulos e projeta políticas de investimento de longo prazo. A primeira parte do livro fornece uma conta teórica sobre otimização de portfólio e paridade de risco. O autor discute a teoria da carteira moderna e oferece um guia abrangente para orçamentação de riscos. Cada capítulo da segunda parte apresenta uma aplicação de paridade de risco para uma classe de ativos específica. O texto abrange a indexação de equidade baseada no risco (também chamado de beta inteligente) e mostra como usar técnicas de orçamentação de risco para gerenciar portfólios de títulos. Ele também explora investimentos alternativos, como commodities e hedge funds, e aplica técnicas de paridade de risco para classes de vários ativos. O primeiro appendix dos livros fornece materiais técnicos sobre problemas de otimização, funções de copula e alocação dinâmica de ativos. O segundo apêndice contém 30 exercícios de tutorial. Soluções para exercícios, slides para instrutores e programas de computador Gauss para reproduzir os exemplos, tabelas e figuras de livros estão disponíveis no site dos livros. Chapman HallCRC Série de Matemática Financeira, 410 páginas Ir para o site dos livros La Gestion dActifs Quantitativo A convergência da gestão tradicional e da alternativa de gestão, parte da duna, lmergência da gestão quantitativa, dautre parte, refluxo da mutação profunda da gestão dactifs. Ce livre propõe daborder ces diffrents thmes, tous bass sur le contrle risque et les modles dallocation dactifs. Este trabalho oferece um panorama de difrances modalidades de gestão quantitativa, encaminhe a gestão indicielle la gestion hedge funds en passant pela estrutura gestions, diversifie, profile ou de performance absolue. Louvrage prsente galement les diffrentes stratgies quantitativas, que são as estratagens de replicação, deslocalização, doptions, volatilit, darbitrage ou encore as estratégias de acompanhamento e de retorno da média. Este é um questionário especial sobre loptimisation de portefeuille, lconomtrie financire et les stratgies de gestion semboitent pour ancien une stratgie quantitative. Este livro contém muitas ilustrações e exemplos importantes sobre as classes de escritórios (ações, taxas de diner, mudança e matizes). Ce livre sadresse aux tudiants de master, qui veut devenir des quants et travailler dans la finance quantitative, et aux professionnels qui cherchent mieux comprendre les modles mathmatiques et statistiques utiliss dans la gestion dactifs. Editions Economica, Collection Finance, 680 páginas Tlcharger la table des matires. Les extraits du livre. Exercícios de lannexe sur les. A correcção dos exercícios. (Consulte também os programas de correspondentes de Gauss) e as aplicações numriques do livre A gestão dos riscos financeiros (duime) Esta nova data no loccasion de revoir inteiro o texto, de remover o número certo de desenvolvimento que são mais dactualit e dapporter un clairage Nouveau par rapport la crise actuelle. Elle também contém novas ilustrações e novas aplicações para conceituar melhor alguns conceitos que podem aparecer em complexos. Diversos tópicos de lobos de novos desenvolvimentos, por exemplo, o risco de liquidez, os produtos exotiques, o risco de contraparte de mercado, os produtos estruturados, a gestão do risco de março na gestão de recursos, a dependência em Crdit et la contribution en risque. Finalmente, essa dupla é aprovada dexercices para permitir a obtenção de conhecimentos. Editions Economica, Collection Finance, 560 páginas Tlcharger les programs Gauss. Les errata du livre. A tabela de maustras e a correcção dos exercícios do livre A gestão dos riscos financeiros A gestão dos riscos financeiros está em plena plena vida sob a pressão da supervisão e do desenvolvimento de instrumentos de segurança para o melhor matrimónio. Le Comit de Ble a publi le Nouvel Accord sur le ratio international de solvabilit (Ble II) le 26 juin 2004, e a Comissão Europenne a dj adotar as diferentes propostas de acordo. Este acordo é um benefício favorável pela profissão bancária e os bancos de dados financeiros agora. As empresas não estão mais presentes no Novo Acordo para o modernizador de sua gestão de riscos. Nos últimos anos, no assiste en effet, a técnica de desenvolvimento de gerenciamento de riscos e os modelos para mesurer les risques sont de plus en plus sophistiqus. Le Nouvel Accord participe dailleurs cette volution, puisbil vise dfinir un capital rglementaire plus proche du capital conomique obtenu com les modules integrados. Leprsent ouvrage sinscrit in ces deux lignes guidelines. Rglementation du risque et modlisation du risque. Il sadresse aussi bien des tudiants de troisiem cycle, qui dsirent acqurir une culture financie du risque et de sa gestion, qu des professionnels qui cherchent mieux comprendre les fondements de la modulation mathmatique du risque. Editions Economica, Collection Gestion, 455 páginas Tlcharger os programas Gauss e as aplicações numéricas do livro TSM (Time Series e Wavelets for Finance) TSM é uma biblioteca GAUSS para modelagem de séries temporais em domínio de tempo e domínio de freqüência. É projetado principalmente para a análise e estimativa de processos ARMA, VARX, modelos espaciais estaduais, processos fracionários e modelos estruturais. Para estudar esses modelos, ferramentas especiais foram desenvolvidas como procedimentos para simulação, análise espectral, matrizes de Hankel, etc. A estimativa é baseada no princípio da máxima probabilidade ou no Método de Momentos gerados e as restrições lineares podem ser facilmente impostas. Ele também contém vários métodos de filtragem (Filtro Kalman, FLS e GFLS) e vários procedimentos para análise Time-Frequency do sinal 1-D (análise de wavelet e análise de pacotes wavelet). Código fonte: 300 Ko, código de exemplos: 390 Ko, Manual: 230 páginas. Descrição do TSM na página da Gauss Aptech Systems Baixar exemplos do TSM Introdução a programação sous Gauss 1995 Design Global, 660 páginas T. Roncalli e G. Weisang À medida que os reguladores em todo o mundo progridem para reformas prudenciais do sistema financeiro global para abordar a questão do risco sistêmico, O vasto alcance da tarefa atinge áreas e atores dos mercados financeiros que, tipicamente, não foram vistos como sistematicamente importantes antes. A idéia de que o setor de gerenciamento de ativos pode contribuir para o risco sistêmico é nova e garante um exame detalhado para moldar políticas adequadas. Neste artigo, depois de analisar a definição de risco sistêmico e como os bancos e seguros sistemicamente importantes são designados, analisamos as atividades do setor de gerenciamento de ativos e as formas como eles podem contribuir para a transmissão de risco sistêmico. Em seguida, examinamos detalhadamente a proposta de FSB-IOSCO de março de 2015 para uma metodologia de avaliação para a identificação de instituições financeiras não-bancárias não-segmentadas de importância sistêmica. Comparamos e discutimos com dados empíricos como as feiras de metodologia contra o que a literatura e o rescaldo da crise de 2007-2008 revelam sobre o papel do setor de gestão de ativos em contribuir para o risco sistêmico. Nós achamos que a proposta atual em parte não consegue identificar adequadamente os candidatos naturais para a designação sistemicamente importante e talvez confunde grandes instituições com instituições sistémicamente estratégicas que dão à perda de riqueza muita importância sobre o potencial de interrupção econômica real e deslocamento do mercado. Finalmente, pedimos uma abordagem mais robusta e sensível ao risco para identificar instituições financeiras de importância sistêmica. Risco sistêmico, SIFI, gerentes de ativos, proprietários de ativos, interconexão, risco de liquidez, risco de reputação, risco de negócios, risco de crédito de contraparte, risco de mercado, período de liquidação, fundos indexados, fundos do mercado monetário, fundos negociados em bolsa, hedge funds. Faça o download do arquivo PDF J-C. Richard e T. Roncalli Neste artigo, consideramos uma nova estrutura para entender as carteiras baseadas em risco (GMV, EW, ERC e MDP). Essa estrutura é semelhante ao modelo de variância mínima restrita de Jurczenko et al. (2013), mas com outra definição da restrição de diversificação. O problema de otimização correspondente pode então ser resolvido usando o algoritmo CCD. Isso nos permite ampliar os resultados de Cazalet et al. (2014) e para entender melhor as relações de trade-off entre redução de volatilidade, erro de rastreamento e diversificação de riscos. Em particular, mostramos que as carteiras beta inteligentes diferem porque eles implicitamente visam diferentes níveis de redução de volatilidade. Também desenvolvemos novas estratégias beta inteligentes ao gerenciar o nível de redução da volatilidade e mostrar que apresentam propriedades atraentes em comparação com as tradicionais carteiras com base em risco. Smart beta, alocação baseada em risco, portfólio de variância mínima, GMV, EW, ERC, MDP, otimização de portfólio, algoritmo CCD. Baixe o arquivo PDF Z. Cazalet e T. Roncalli O modelo de precificação de capital próprio (CAPM) desenvolvido por Sharpe (1964) é o ponto de partida para a teoria de preços de arbitragem (APT). Ele usa um único fator de risco para modelar o prêmio de risco de uma classe de ativos. No entanto, o CAPM tem sido objeto de pesquisas importantes, que evidenciaram numerosas contradições empíricas. Com base na teoria APT proposta por Ross (1976), Fama e French (1992) e Carhart (1997) apresentam outros modelos de fatores comuns para capturar novos prémios de risco. Por exemplo, eles definem fatores de risco patrimoniais, como mercado, valor, tamanho e impulso. Nos últimos anos, surgiu um novo quadro baseado nesta literatura para definir a alocação estratégica de ativos. Da mesma forma, os provedores de índice e os gerentes de ativos agora oferecem a oportunidade de investir nesses fatores de risco através de índices de fatores e fundos mútuos. Essas duas abordagens levaram a um novo paradigma chamado factor de investimento (Ang, 2014). O investimento por fatores parece resolver algumas das questões de gerenciamento de portfólio que surgiram no passado, em particular para os investidores de longo prazo. No entanto, surgem algumas questões, especialmente com o número de fatores de risco que crescem nos últimos anos (Cochrane, 2011). O que é um fator de risco São todos os fatores de risco bem recompensados Qual é o seu nível de estabilidade e robustez Como devemos alocar entre eles O principal objetivo deste trabalho é compreender e analisar a abordagem de investidores de fatores para responder a essas questões. Investimento por fatores, risco premium, CAPM, modelo de fatores de risco, anomalia, tamanho, valor, impulso, volatilidade, risco idiossincrático, liquidez, carry, qualidade, fundos mútuos, hedge funds, beta alternativa, alocação estratégica de ativos. Baixe o arquivo PDF A paridade do risco é um método de alocação utilizado para a construção de carteiras diversificadas que não dependem de qualquer hipótese de retornos esperados, colocando assim o gerenciamento de riscos no centro da estratégia. Isso explica por que a paridade do risco tornou-se um modelo de investimento popular após a crise financeira global em 2008. No entanto, a paridade do risco também foi criticada porque se concentra no gerenciamento da concentração de risco e não no desempenho do portfólio e, portanto, é visto como sendo mais próximo do gerenciamento passivo do que o ativo gestão. Neste artigo, mostramos como introduzir os pressupostos dos retornos esperados nas carteiras de paridade de risco. Para fazer isso, consideramos uma medida de risco generalizada que leva em consideração tanto o retorno quanto a volatilidade do portfólio. No entanto, o trade-off entre contribuições de desempenho e volatilidade cria alguma dificuldade, enquanto o problema de orçamentação de risco deve ser claramente definido. Depois de derivar as propriedades teóricas de tais carteiras de orçamento, aplicamos esse novo modelo à alocação de ativos. Em primeiro lugar, consideramos a política de investimento a longo prazo e a determinação da alocação estratégica de ativos. Consideramos a alocação dinâmica e mostramos como criar fundos de paridade de risco que dependem dos retornos esperados. Paridade de risco, orçamento de risco, retornos esperados, portfólio de ERC, valor em risco, déficit esperado, gerenciamento ativo, alocação de ativos táticos, alocação estratégica de ativos. Faça o download do arquivo PDF T. Roncalli e B. Zheng A liquidez dos fundos negociados em bolsa é de extrema importância para os reguladores, investidores e provedores. No entanto, o estudo da liquidez ainda está em sua infância. Neste trabalho, mostramos alguns fatos estilizados de estatísticas de liquidez (disseminação diária no mercado, volume comercial, etc.). Proponemos também uma nova medida de liquidez que combina estas estatísticas. Neste caso, a liquidez é uma função de poder do spread onde os parâmetros são determinados pelos volumes de negociação reais. Também estudamos a relação entre liquidez de ETF e liquidez do índice subjacente. Mostramos que estão correlacionados diariamente, mas não em termos de frequência intradia. Também definimos uma medida de melhoria de liquidez e aplicamos-na ao índice EURO STOXX 50. Fundo negociado em bolsa, liquidez, spread, volume de negócios, livro de encomendas, melhoria de liquidez. Faça o download do arquivo PDF T. Roncalli e G. Weisang T. Griveau-Billion, J-C. Richard e T. Roncalli Neste artigo, propomos um algoritmo cíclico de descendência de coordenadas (CCD) para resolver problemas de paridade de alto risco dimensional. Mostramos que esse algoritmo converge e é muito rápido mesmo com grandes matrizes de covariância (n 500). A comparação com os algoritmos existentes também mostra que é um dos algoritmos mais eficientes. Paridade de risco, orçamento de risco, portfólio de ERC, algoritmo de descendência de coordenadas cíclicas, algoritmo de SQP, algoritmo de Jacobi, algoritmo de Newton, algoritmo de Nesterov. Baixe o arquivo PDF Z. Cazalet, P. Grison e T. Roncalli Neste artigo, consideramos a indexação beta inteligente, que é uma alternativa à indexação de capitalização (CW). Em particular, nos concentramos na indexação baseada em risco (RB), cujo objetivo é capturar o prêmio de risco de equidade de forma mais eficaz. Para conseguir isso, as carteiras são construídas, que são mais diversificadas e menos voláteis do que as carteiras de CW. No entanto, as carteiras de RB são menos líquidas do que as carteiras de CW por construção. Além disso, eles também apresentam dois riscos em termos de gerenciamento passivo: rastreamento de risco de diferença e risco de erro de rastreamento. Os investidores beta inteligentes têm que descobrir o trade-off entre diversificação, volatilidade, liquidez e erro de rastreamento. Este artigo examina os trade-off relationships. Ele também define os componentes de retorno dos índices beta inteligentes. Smart beta, indexação baseada em risco, portfólio de variância mínima, paridade de risco, carteira igualmente ponderada, portfólio de contribuição de risco igual, diversificação, baixa anomalia beta, baixa anomalia de volatilidade, erro de rastreamento, liquidez. Faça o download do arquivo PDF B. Bruder, N. Gaussel, J-C. Richard e T. Roncalli A teoria da otimização de variância média (MVO) de Markowitz (1952) para seleção de portfólio é um dos métodos mais importantes utilizados nas finanças quantitativas. Essa alocação de portfólio precisa de dois parâmetros de entrada, o vetor de retornos esperados e a matriz de covariância dos retornos de ativos. Esse processo leva a erros de estimativa, que podem ter um grande impacto nos pesos do portfólio. Neste artigo, revisamos diferentes métodos que visam estabilizar a alocação de variância média. Em particular, consideramos os resultados recentes da teoria da aprendizagem de máquinas para obter uma alocação mais robusta. Otimização de portfólio, gerenciamento ativo, erro de estimativa, estimador de encolhimento, métodos de reescalonamento, eigendecomposição, restrições de norma, regressão Lasso, regressão de cume, matriz de informações, portfólio de hedge, sparsity. Baixe o arquivo PDF M. Hassine e T. Roncalli A seleção do fundo é uma questão importante para os investidores. Este tópico gerou abundante literatura acadêmica. No entanto, na maioria das vezes, esses trabalhos dizem respeito apenas a uma gestão ativa, enquanto muitos investidores, como investidores institucionais, preferem investir em fundos indexados. As ferramentas desenvolvidas no caso de gerenciamento ativo também não são adequadas para avaliar o desempenho desses fundos indexados. Isso explica por que os índices de informação geralmente são usados para comparar o desempenho de fundos passivos. No entanto, mostramos que esta medida não é pertinente, especialmente quando a volatilidade do erro de rastreamento do fundo do índice é pequena. O objetivo de um fundo negociado em bolsa (ETF) é precisamente oferecer um veículo de investimento que apresenta um erro de rastreamento muito baixo em relação ao seu benchmark. Neste artigo, propomos uma medida de desempenho baseada no quadro de valor em risco, que está perfeitamente adaptado à gestão passiva e aos ETFs. Dependendo de três parâmetros (diferença de desempenho, volatilidade de erro de rastreamento e spread de liquidez), esta medida de eficiência é fácil de calcular e pode ajudar os investidores em seu processo de seleção de fundos. Nós fornecemos alguns exemplos e mostramos como a liquidez é mais uma questão para os investidores institucionais do que os investidores de varejo. Gestão passiva, fundo índice, ETF, índice de informação, erro de rastreamento, liquidez, spread, valor em risco. Baixe o arquivo PDF T. Roncalli e G. Weisang T. Roncalli e G. Weisang A construção da carteira e a orçamentação de riscos são o foco de muitos estudos realizados por acadêmicos e profissionais. Em particular, a diversificação tem muito interesse e foi definida de forma muito diferente. Neste artigo, analisamos um método para alcançar a diversificação de portfólio com base na decomposição do risco de carteiras em contribuições de fator de risco. Primeiro, expor o relacionamento entre fator de risco e contribuições de ativos. Em segundo lugar, formulamos o problema da diversificação em termos de fatores de risco como um programa de otimização. Finalmente, ilustramos nossa metodologia com alguns exemplos de vida real e backtests, que são: orçamentar o risco de fatores de equidade Fama-Franceses, maximizar a diversificação de uma carteira de hedge funds e construir uma alocação estratégica de ativos com base em fatores econômicos. Paridade de risco, orçamentação de risco, modelo de fator, portfólio de ERC, diversificação, concentração, modelo de Fama-French, alocação de hedge funds, alocação estratégica de ativos. Baixe o arquivo PDF B. Bruder, L. Culerier e T. Roncalli Vários anos atrás, surgiu o conceito de fundos de data-alvo para complementar os fundos tradicionais equilibrados em planos de pensão de contribuição definida. A principal idéia é delegar a alocação dinâmica em relação à data de aposentadoria de indivíduos para o gerente de portfólio. Devido ao seu horizonte de longo prazo, um fundo de data-alvo é único e não pode ser comparado a um fundo mútuo. Além disso, o objetivo do indivíduo é contribuir ao longo de sua vida profissional investindo parte de seus rendimentos para maximizar seus benefícios de pensão. O objetivo principal deste artigo é analisar e entender a alocação dinâmica em uma estrutura de fundo de data-alvo. Mostramos que a exposição ideal no portfólio de risco varia ao longo do tempo e é muito sensível aos parâmetros do mercado e dos investidores. Em seguida, deduzimos algumas diretrizes práticas para melhor designar fundos de data-alvo para o setor de gerenciamento de ativos. Fundo de data-alvo, fundo de ciclo de vida, sistema de aposentadoria, alocação dinâmica de ativos, controle ótimo estocástico, portfólio de mercado, aversão ao risco, política de mix de ativos estoque. Faça o download do arquivo PDF Basileia II, medição do risco de crédito, gerenciamento de portfólio de crédito, problemas de inconsistência no tempo. Faça o download do arquivo PDF N. Baud, A. Frachot e T. Roncalli 01 de dezembro de 2002 Intensas reflexões estão sendo realizadas no momento em relação à forma de reunir dados heterogêneos provenientes de sistemas internos dos bancos e bancos de dados agrupados na indústria. Propomos aqui uma metodologia sólida. Como se baseia no princípio da máxima verossimilhança, é, portanto, estatisticamente rigoroso e deve ser aceito pelos supervisores. Acreditamos que ele resolve a maior parte da heterogeneidade de dados e problemas de escala. Risco operacional, carga de capital, limiar, distribuição condicional, máxima verossimilhança. Faça o download do arquivo PDF N. Baud, A. Frachot e T. Roncalli É amplamente reconhecido que a calibração em dados internos pode não ser suficiente para calcular uma carga de capital precisa contra o risco operacional. No entanto, a associação de dados externos e internos leva a taxas de capital inaceitáveis, pois os dados externos geralmente são distorcidos para grandes perdas. Em um artigo anterior, desenvolvemos uma metodologia estatística para assegurar que a fusão de dados internos e externos leva a estimativas imparciais da distribuição de perdas. Este artigo mostra que esta metodologia é aplicável no gerenciamento de risco da vida real e que permite reunir dados internos e externos de forma apropriada. O artigo está organizado da seguinte forma. Primeiro, discutimos como os bancos de dados externos são projetados e como seu design pode resultar em falhas estatísticas. Em seguida, desenvolvemos um modelo para o processo de geração de dados que está subjacente a dados externos. Neste modelo, o viés vem simplesmente do fato de que os dados externos são truncados acima de um limite específico, enquanto este limiar pode ser constante, mas conhecido, ou constante, mas desconhecido, ou finalmente estocástico. Nós descrevemos o raciocínio por trás desses três casos e nós fornecemos para cada um deles uma metodologia para contornar o viés relacionado. Em cada caso, são dadas simulações numéricas e evidências práticas. Risco operacional, dados internos, dados externos, dados do consórcio, limiar. Faça o download do arquivo PDF N. Baud, A. Frachot e T. Roncalli Slides da conferência Seminarios de Matemática Financeira, Instituto MEFF - Risklab. Madrid. Risco operacional, LDA, dados internos, dados externos, limiar implícito. Baixe o arquivo PDF J-F. Jouanin, G. Riboulet e T. Roncalli 31 de janeiro de 2002 Versão não técnica do documento Dependência de modelagem para derivativos de crédito com copulas. Copulas, modelos de intensidade, pontuação de diversidade de Moodys. Baixe o arquivo PDF A. Frachot e T. Roncalli Januray 29, 2002 A Abordagem de Distribuição de Perdas tem muitas características atraentes, uma vez que se espera que seja muito mais sensível ao risco do que qualquer outro método tomado em consideração pelas últimas propostas do Comitê de Basileia. Assim, espera-se que esta abordagem forneça taxas de capital significativamente mais baixas para os bancos cujos antecedentes são particularmente bons relativamente às suas exposições e comparados com os benchmarks da indústria. Infelizmente, a LDA quando calibrada apenas em dados internos está longe de ser satisfatória de uma perspectiva reguladora, pois provavelmente poderia subestimar a carga de capital necessária. Isso acontece por dois motivos. Primeiro, se um banco tiveram um número de eventos menor do que a média, ele se beneficiará de uma carga de capital inferior à média, embora seu bom histórico tenha ocorrido por acaso e não resulte de práticas de gerenciamento de risco melhores do que médias . Como conseqüência, a LDA é aceitável, desde que os dados de freqüência interna sejam temperados por referências em toda a indústria. Como tal, levanta imediatamente a questão de como lidar com dados de freqüência interna e benchmarks externos. Este artigo propõe uma solução baseada na teoria da credibilidade que é amplamente utilizada no setor de seguros para enfrentar problemas análogos. Como resultado, mostramos como fazer o ajuste estatístico para temperar a informação transmitida por dados de freqüência interna com o uso de referências externas. Da mesma forma, se a calibração dos parâmetros de gravidade ignora os dados externos, a distribuição da gravidade provavelmente será tendenciosa para perdas de baixa gravidade, uma vez que as perdas internas são tipicamente inferiores às registradas em bancos de dados industriais. Novamente, de uma perspectiva reguladora, a LDA não pode ser aceita, a menos que os dados internos e externos sejam mesclados e o banco de dados mesclado seja usado no processo de calibração. Aqui novamente, levanta a questão da melhor forma de mesclar esses dados. Obviamente, isso não pode ser feito sem qualquer cuidado, pois se as bases de dados internas são alimentadas diretamente com dados externos, as distribuições de severidade serão fortemente tendenciosas para perdas de alta gravidade. Este artigo propõe também um ajuste estatístico para tornar comparáveis bancos de dados internos e externos entre si, a fim de permitir uma fusão segura e imparcial. Risco operacional, LDA, dados internos, dados externos, teoria da credibilidade. Faça o download do arquivo PDF 26 de outubro de 2001 Apresentações da conferência Sminaire de Mathématiques e Finanças Louis Bachelier, Institut Henri Poincar. Copulas, derivativos de crédito, opções multi-ativos. Faça o download do arquivo PDF S. Coutant, V. Durrleman, G. Rapuch e T. Roncalli 5 de setembro de 2001 Neste artigo, usamos copulas para definir distribuições multivariadas de risco neutro. Podemos então derivar fórmulas de preços gerais para opções de ativos múltiplos e melhores limites possíveis com sorrisos de volatilidade dados. Finalmente, aplicamos o framework copula para definir indicadores prospectivos da função de dependência entre os retornos de ativos. Copulas, distribuição neutra ao risco, mudança de numerário, preço de opção, RND multivariada implícita. Baixe o arquivo PDF J-F. Jouanin, G. Rapuch, G. Riboulet e T. Roncalli Neste artigo, abordamos o problema de incorporar dependência padrão em modelos de risco de crédito baseados em intensidade. Seguindo os trabalhos de Li 2000, Giesecke 2001 e Schonbucher e Schubert 2001, usamos copulas para modelar a distribuição conjunta dos tempos padrão. São consideradas duas abordagens. O primeiro consiste em modelar a função de sobrevivência das articulações diretamente com as copulas de sobrevivência dos tempos padrão, enquanto que na segunda abordagem, as cópulas são usadas para correlacionar as variáveis aleatórias exponenciais do limiar. Comparamos essas duas abordagens e damos alguns resultados sobre seus relacionamentos. Em seguida, tentamos algumas simulações de produtos simples, como primeiro a padrão. Finalmente, discutimos a questão da calibração de acordo com a nota de diversidade de Moodys. Copulas, modelos de intensidade, processos de Cox, processos de Bessel, pontuação de diversidade de Moodys. Baixe o arquivo PDF G. Rapuch e T. Roncalli Nesta breve nota, consideramos alguns problemas de preços de opções de dois ativos. Em particular, investigamos a relação entre preços de opções e o parâmetro de correlação no modelo Black-Scholes. Então, consideramos o caso geral no âmbito da construção de cópula de distribuições neutras em risco. Esta extensão envolve resultados na ordem supermodular aplicada à representação de Feynman-Kac. Mostramos que poderia ser visto como uma generalização de um princípio máximo para a PDE parabólica. Copulas, opções de dois ativos (Spread, Basket, Min, Max, BestOf, WorstOf), ordem supermodular, ordem de concordância, limites de Fritch, representação de Feynman-Kac, princípio máximo, PDE parabólica. Baixe o arquivo PDF Slides da conferência Statistics 2001, Concordia University, Montral, Canadá. Copulas, hipótese gaussiana, risco operacional, copula neutra em risco, modelo de Heston. Faça o download do arquivo PDF P. Georges, A-G. Lamy, E. Nicolas, G. Quibel e T. Roncalli Neste artigo, analisamos o uso de copulas para modelagem de sobrevivência multivariada. Em particular, estudamos as propriedades das copulas de sobrevivência e discutimos as medidas de dependência associadas a esta construção. Então, consideramos o problema dos riscos concorrentes. Derivamos a distribuição das estatísticas de tempo e ordem de falha. Depois de ter apresentado uma inferência estatística, nós finalmente fornecemos aplicações financeiras que dizem respeito ao valor do tempo de vida (modelos de atrito), o vínculo entre o padrão, pré-pagamento e vida credora, a medida de risco para uma carteira de crédito e o preço de derivativos de crédito. Copula de sobrevivência, modelo de fragilidade, conceitos de envelhecimento, riscos concorrentes, tempo de falha, estatísticas de pedidos, pagamento antecipado, medida de risco de crédito, modo padrão, inadimplência correlacionada, carga de capital de risco, entrega digital padrão, troca de crédito padrão, primeiro a padrão. Baixe o arquivo PDF Slides do seminário Modelos estocásticos em finanças, Ecole Polytechnique, Paris, 23042001. Copulas, regressão quantile, markov copulas, risco de crédito, convergência uniforme, operações em funções de distribuição. Faça o download do arquivo PDF A. Frachot, P. Georges e T. Roncalli Neste trabalho, exploramos a Abordagem de Distribuição de Perdas (LDA) para calcular a carga de capital de um banco para risco operacional, onde LDA se refere a métodos estatísticos atuais para modelar a distribuição de perdas . Nessa estrutura, a carga de capital é calculada usando uma medida de Valor em Risco. Na primeira parte do documento, damos uma descrição detalhada da implementação da LDA e explicamos como ela poderia ser usada para alocação de capital econômico. Em particular, mostramos como calcular a distribuição da perda agregada, combinando a distribuição da gravidade da perda e a distribuição da frequência das perdas, como calcular o Capital-em-Risco total usando copulas, como controlar a parte superior da distribuição da gravidade da perda com a ordem Estatisticas. Na segunda parte do trabalho, comparamos a LDA com a abordagem de medição interna (IMA) proposta pelo Comitê de Basileia sobre Supervisão Bancária para calcular o capital regulatório para o risco operacional. LDA e IMA são modelos de medição interna de baixo para cima que aparentemente são diferentes. No entanto, poderíamos mapear a LDA para o IMA e dar algumas justificativas sobre a escolha feita pelos reguladores para definir o IMA. Finalmente, fornecemos maneiras alternativas de mapear ambos os métodos juntos. Risco operacional, perda agregada, distribuição composta, severidade de perdas, freqüência de perda, algoritmo Panjer, Capital-em-Risco, alocação de capital econômico, estatísticas de pedidos, LDA, IMA, RPI, copulas. Baixe o arquivo PDF V. Durrleman, A. Nikeghbali e T. Roncalli Slides para a Conferência Internacional de Finanças, Hammam-Sousse, Tunísia, 03172001. Copulas, função de dependência de risco, copulas singulares, pontos extremos, agregação quantile, opção de propagação. Faça o download do arquivo PDF 26 de janeiro de 2001 Apresentações do seminário Métodos estatísticos em gestão integrada de riscos organizada pela Frontiers in Finance. Copulas, preço de opção 2D, processos markov, risco de crédito, CreditMetrics, CreditRisk, primeiro a padrão. Baixe o arquivo PDF J. Bodeau, G. Riboulet e T. Roncalli 15 de dezembro de 2000 Neste artigo, consideramos redes não uniformes para resolver PDE. Nós derivamos o algoritmo theta-scheme com base em métodos de diferenças finitas e mostra sua consistência. Em seguida, aplicamos isso a diferentes problemas de preços de opções. Theta-scheme, grades não-uniformes, grades temporais, interpolação de spline cúbica, opção europeia, opção americana, opção de barreira. Download the PDF file Download the corresponding GAUSS library November 16, 2000 Slides of the seminar Financial Applications of Copulas. Copulas, financial applications, risk management, statistical modelling, probabilistic metric spaces, markov operators, quasi-copulas. Download the PDF file V. Durrleman, A. Nikeghbali and T. Roncalli November 23, 2000 In this paper, we consider the open question on Spearmans rho and Kendalls tau of Nelsen 1991. Using a technical hypothesis, we can answer in the positive. One question remains open: how can we understand the technical hypothesis Because this hypothesis is not right in general, we could find some pathological cases which contradict Nelsens conjecture. Spearmans rho, Kendalls tau, cubic copula. Download the PDF file E. Bouy, V. Durrleman, A. Nikeghbali G. Riboulet and T. Roncalli March 23, 2001 (First version: November 10, 2000) In this paper, we show that copulas are a very powerful tool for risk management since it fulfills one of its main goals: the modelling of dependence between the individual risks. That is why this approach is an open field for risk. Copulas, market risk, credit risk, operational risk. Download the PDF file A. Costinot, T. Roncalli and J. Teiumlletche October 24, 2000 We consider the problem of modelling the dependence between financial markets. In financial economics, the classical tool is the Pearson (or linear correlation) coefficient to compare the dependence structure. We show that this coefficient does not give a precise information on the dependence structure. Instead, we propose a conceptual framework based on copulas. Two applications are proposed. The first one concerns the study of extreme dependence between international equity markets. The second one concerns the analysis of the East Asian crisis. Linear correlation, extreme value theory, quantile regression, concordance order, Deheuvels copula, contagion, Asian crisis. Download the PDF file A. Costinot, G. Riboulet et T. Roncalli September 15, 2000 Les banques ont aujourdhui la possibilit de mettre en place un modle interne de risque de march. Lune des composantes indispensables de ce modle est la cration dun programme de stress testing. Cet article prsente un outil potentiel pour la construction dun tel programme. la thorie des valeurs extrmes. Aprs avoir rappel la rglementation propre au stress testing et les principaux rsultats de cette thorie, nous montrons comment les utiliser pour construire des scnarios unidimensionnels, multidimensionnels et enfin pour quantifier des scnarios de crise labors partir de mthodologies diffrentes. Aux considrations mthodologiques sont adjoints les rsultats des simulations que nous avons ralises sur diffrentes sries financires. Copules, fonction de dpendance de queue stable, thorie des valeurs extrmes, stress testing. Tlcharger le fichier PDF V. Durrleman, A. Nikeghbali and T. Roncalli September 10, 2000 In this paper, we consider the problem of bounds for distribution convolutions and we present some applications to risk management. We show that the upper Frchet bound is not always the more risky dependence structure. It is in contradiction with the belief in finance that maximal risk corresponds to the case where the random variables are comonotonic. Triangle functions, dependency bounds, infimal, supremal and sigma-convolutions, Makarov inequalities, Value-at-Risk, square root rule, Dallaglio problem, Kantorovich distance. Download the PDF file V. Durrleman, A. Nikeghbali and T. Roncalli In this paper, we study the approximation procedures introduced by Li, Mikusinski, Sherwood and Taylor 1997. We show that there exists a bijection between the set of the discretized copulas and the set of the doubly stochastic matrices. For the Bernstein and checkerboard approximations, we then provide analytical formulas for the Kendalls tau and Spearmans rho concordance measures. Moreover, we demonstrate that these approximations do not exhibit tail dependences. Finally, we consider the general case of approximations induced by partitions of unity. Moreover, we show that the set of copulas induced by partition of unity is a Markov sub-algebra with respect to the - product of Darsow, Nguyen and Olsen 1992. Doubly stochastic matrices, Bernstein polynomials approximation, checkerboard copula, partitions of unity, Markov algebras, product of copulas. Download the PDF file V. Durrleman, A. Nikeghbali and T. Roncalli In this paper, we give a few methods for the choice of copulas in financial modelling. Maximum likelihood method, inference for margins, CML method, point estimator, non parametric estimation, Deheuvels copula, copula approximation, discrete L norm. Download the PDF file V. Durrleman, A. Nikeghbali and T. Roncalli We study how copulas properties are modified after some suitable transformations. In particular, we show that using appropriate transformations permits to fit the dependence structure in a better way. gamma-transformation, Kendalls tau, Spearmans rho, upper tail dependence. Download the PDF file V. Durrleman, A. Kurpiel, G. Riboulet and T. Roncalli In this paper, we consider 2D option pricing. Most of the problems come from the fact that only few closed-form formulas are available. Numerical algorithms are also necessary to compute option prices. This paper examines some topics on this subject. Numerical integration methods, Gauss quadratures, Monte Carlo, Quasi Monte Carlo, Sobol sequences, Faure sequences, two-dimensional PDE, Hopscotch, LOD, ADI, MOL, Stochastic volatility model, Malliavin calculus. Paper presented at the 17th International Conference in Finance organized by the French Finance Association, Paris (June 28, 2000). Download the PDF file E. Bouy, V. Durrleman, A. Nikeghbali, G. Riboulet and T. Roncalli Copulas are a general tool to construct multivariate distributions and to investigate dependence structure between random variables. However, the concept of copula is not popular in Finance. In this paper, we show that copulas can be extensively used to solve many financial problems. Multivariate distribution, dependence structure, concordance measures, scoring, Markov processes, risk management, extreme value theory, stress testing, operational risk, market risk, credit risk. Paper presented at the 17th International Conference in Finance organized by the French Finance Association, Paris (June 27, 2000) and at First World Congress of the Bachelier Finance Society (June 29, 2000). Download the PDF file N. Baud, P. Demey, D. Jacomy, G. Riboulet et T. Roncalli Comme son nom lindique, le Plan Epargne Logement est un produit dpargne qui permet dacqurir des droits prts pour financer un ventuel achat immobilier. Pour que les tablissements financiers et les particuliers y trouvent un intrt commun, le lgislateur a mis en place un systme de prime pendant la phase dpargne. Celui-ci est peru comme un systme incitatif pour le particulier et doit permettre dassurer la rentabilit du produit pour la banque. Une note rdige par le Trsor en 1996 conclut la rentabilit du PEL pour les banques. Largument repose sur le fait que les pertes (ventuelles) supportes par la banque pendant la phase demprunt sont largement compenses par les revenus de la phase dpargne. En rponse cette note lAFB sest attache montrer le contraire en incluant les coucircts lis aux risques de taux (Note de lAFB du 16121996). Il nest donc pas du tout certain que le systme mis en place soit rentable pour ltablissement financier. Dautant plus que le Plan Epargne Logement est un produit financier relativement complexe et que celui-ci contient diffrentes options caches. Le calcul de sa rentabilit est donc beaucoup plus difficile que ceux prsents par le Trsor ou lAFB. Cest pourquoi le GRO a tent de modliser les options caches du PEL, de les valoriser et de calculer la rentabilit finale de ce produit. Plan dpargne logement, option cache de conversion, option amricaine, problme de contrle optimal. Tlcharger le fichier PDF N. Baud, A. Frachot, P. Igigabel, P. Martineu and T. Roncalli December 1, 1999 Capital allocation within a bank is getting more important as the regulatory requirements are moving towards economic-based measures of risk. Banks are urged to build sound internal measures of credit and market risks for all their activities. Internal models for credit, market and operational risks are fundamental for bank capital allocation in a bottom-up approach. But this approach has to be completed by a top-down approach in order to give to bank managers a more comprehensive (but less detailed) vision of the allocation efficiency. From a top-down viewpoint, we are considering the different business lines of a bank as assets. Then the capital has to be allocated in order to balance a portfolio in an optimal way. In this respect, a bank has to evaluate not only the expected return and the risk of every business line, but also the correlation matrix of these business lines returns. If a bank usually has a good knowledge of its expected returns and risks, the problem is more complex in the case of the correlation matrix: to cope with the lack of internal data and information, we develop an approach based on a Market Factor Model and estimate an implied correlation matrix using the returns of a panel of banks. The allocation problem is not exactly the problem a bank is confronted to. It more precisely deals with capital reallocation. Moving from an allocation to a new one generates costs that have to be taken into account to ensure that the new allocation is better than the former one. That is why reallocation signals are more interesting: they do not point out the optimal allocation but they allow the implementation of a dynamic policy that leads to an optimal situation. Capital allocation, top-down, bottom-up, factor model, optimisation problem, Lagrange multipliers. Paper presented at Les petits djeuners de la Finance, Paris (January 27, 2000). Download the PDF file January 13, 1999 In this paper, we consider the use of interest rate contingent claims as indicators for the monetary policy. We analyze two approches: one based on the term structure of zero bonds and another based on interest-rate option derivatives. We show how traditional tools based on the Black framework could be biased to build indicators for monetary policy. In fact, the second approach could not be viewed as an alternative approach, but as a complementary approach of the term structure approach. Yield curve, Hull-White trinomial model, monetary policy. Download the PDF file A. Kurpiel and T. Roncalli December 8, 1998 The purpose of this paper is to analyse different implications of the stochastic behavior of asset prices volatilities for option hedging purposes. We present a simple stochastic volatility model for option pricing and illustrate its consistency with financial stylized facts. Then, assuming a stochastic volatility environment, we study the accuracy of Black and Scholes implied volatility-based hedging. More precisely, we analyse the hedging ratios biases and investigate different hedging schemes in a dynamic setting. option hedging, stochastic volatility, Heston model, delta, gamma, vega. Download the PDF file A. Kurpiel and T. Roncalli November 17, 1998 In this paper, we consider Hopscotch methods for solving two-state financial models. We first derive a solution algorithm for two-dimensional partial differential equations with mixed boundary conditions. We then consider a number of financial applications including stochastic volatility option pricing, term structure modelling with two states and elliptic irreversible investment problems. Two-dimensional PDE, Hopscotch method, parabolic financial models, elliptic problems. Download the PDF file Download the corresponding GAUSS library Thse de lUniversit de Montesqieu-Bordeaux IV. Structure par terme, taux zro, taux forward, mthode de Nelson-Siegel, modles factoriels, processus de diffusion, modle de Black-Derman-Toy, modle de Hull-White. Tlcharger le fichier PDF Tlcharger la bibliothque Gauss J-S. Pentecte, T. Roncalli et M-A. Sngas 1998, LARE, Universit de Bordeaux IV J-S. Pentecte and T. Roncalli 1997, LARE, University of Bordeaux IV2015 Regulatory and Examination Priorities Letter Each year, FINRA publishes its Annual Regulatory and Examination Priorities Letter to highlight issues of importance to FINRAs regulatory programs. Cover Letter from FINRA Chairman and CEO, Rick Ketchum Today, FINRA published its tenth annual Regulatory and Examination Priorities Letter to highlight both emerging and existing risks that, if not properly addressed, could adversely affect investors and market integrity in 2015. Since we began publishing the letter, broker-dealer operations, the markets and regulators have undergone significant changes. Many of these changes are positive, including improvements in firms new-product reviews, increased market transparency and advances in risk-based approaches to regulation. Nevertheless, we also continue to observe shortcomings in five key areas that compromise firms and registered representatives ability to protect investors and the integrity of the market: alignment of firm and customer interests standards of ethical behavior development of strong supervisory and risk management systems development, marketing and sale of novel products and services and management of conflicts of interest. Comprehensive evaluation of these five areas will help firms get ahead of many of the concerns that we raise in this years annual priorities letter. More specific areas of concern are the sale and supervision of interest-rate-sensitive and complex products as well as controls around the handling of wealth events in investors lives, management of cybersecurity risks and maintaining robust oversight of trading technology and other platforms that interact with markets. We urge you to review your business in light of the issues we highlight in the letter and to stay current on new and existing priorities and developments as they arise throughout the year. We will continue to update you on additional areas of increased concern through Regulatory Notices, reports on special initiatives and sweep letters that focus on specific themes. These resources are valuable in helping firms respond to evolving issues, for example, by strengthening their existing procedures and controls. We also value your input on emerging issues that put investors and market integrity at risk, and encourage you to let us know where you think FINRA should focus our regulatory and compliance expertise. Richard G. Ketchum Chairman and CEO Text of the 2015 Regulatory and Examination Priorities Letter Introduction This year marks the tenth edition of the Regulatory and Examinations Priorities Letter. Over the past decade, we have witnessed tremendous change to firms, markets and regulation. Many changes have been positive. Firms have improved their review of new products by integrating business functions with independent perspectives, such as compliance and risk management, articulating standards, documenting decisions and monitoring product performance. Firms have taken steps to better manage conflicts of interest by aligning compensation more closely with customer interests or through risk-adjusted compensation. The markets have become more transparent to retail investors with expanded trade report dissemination. FINRA took steps to enhance transparency in dark pool trading through the publication of reports on alternative trading systems volume on a stock-by-stock basis. Both equity and debt markets have become more open internationally, enabling companies to raise capital where it is most advantageous and investors to diversify their portfolios. Regulators have adopted more risk-based approaches, increased their use of data and analytics, and improved coordination and information sharing. FINRAs examination program is now substantially risk-based, enabling us to allocate our resources to higher-risk firms and individuals. For example, we identify registered representatives with higher risk profiles using analytics, resulting in expedited regulatory responses. FINRA is also sharing information more frequently with domestic and international securities and banking regulators, in particular with the U. S. Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB). Recurring Challenges In addition to the positive changes FINRA has observed, there are a number of lessons learned that firms can find instructive. Over the years, FINRA has observed that challenges in five areas contribute to firms and registered representatives at times compromising the quality of service they provide to customers as well as contribute to compliance and supervisory breakdowns. Addressing these challenges will enable firms to get ahead of many of the concerns that FINRA raises in this letter. Putting customer interests first: A central failing FINRA has observed is firms not putting customers interests first. The harm caused by this may be compounded when it involves vulnerable investors (e. g. senior investors ) or a major liquidity or wealth event in an investors life (e. g. an inheritance or Individual Retirement Account rollover). Poor advice and investments in these situations can have especially devastating and lasting consequences for the investor. Irrespective of whether a firm must meet a suitability or fiduciary standard, FINRA believes that firms best serve their customersand reduce their regulatory riskby putting customers interests first. This requires the firm to align its interests with those of its customers. Firm culture: Many of the problems we have observed in the financial services industry have their roots in firm culture. A poor culture may arise, for example, if firm management places undue emphasis on short-term profits or pursues rapid growth without a concomitant concern for controls. Beyond creating the proper business environment for a good culture to flourish, firms boards and senior executives must articulate and practice high standards of ethical behavior that are expected and visible throughout the organization and are embedded in the firms incentives. These standards should come from the board and executives and not be viewed as a compliance task. The absence of stated standards can contribute to failures at the individual broker level (e. g. disregard for customer needs in recommending securities) and can likewise bring about problems with potentially market wide implications (e. g. manipulation of indices or the manufacture and marketing of unsuitable securities). Firms must protect their culture against individual bad actors, as well as firm wide behaviors that can gradually erode that culture. Firm policies should signify that poor practices, whatever the magnitude of the harm caused or potential implications, will not be tolerated. Supervision, risk management and controls: A firms systems of supervision. risk management and controls are essential safeguards to protect and reinforce a firms culture. Maintaining the right culture includes having robust processes around basic functions such as hiring. Strong supervisory and risk management systems also prevent inadvertent harm to customers (e. g. a firm failing to provide the proper breakpoint ), as well as defend against deliberate acts of malfeasance (e. g. a trader concealing position limit breaches or an executive manipulating accounting balances to make the firms financial status and results appear stronger than they are). Proactive supervisory programs and controls play a crucial role in this effort and many firms have turned to data analytics to help identify problematic behavior. One indicator that a firm is succeeding in a proactive approach would be that it has already identified and addressed the concerns FINRA identifies in this letter. Product and service offerings: While firms have improved new-product review processes, the sales of novel products and services remain a regulatory flashpoint. Some of the issues that have caused harm to investors and landed firms in regulatory difficulties include product complexity, opacity in the market for a product or its underlying components, insufficient or generic disclosure, enticing teaser rate fee structures and insufficient training for salespersons to understand the products. These challenges underscore the need for firms to continue to conduct rigorous new product reviews, assess reasonable-basis and customer-specific suitability prior to offerings and permit wealth management to make independent decisions about the products and services that are best for their customers. Conflicts of interest: Conflicts of interest are a contributing factor to many regulatory actions FINRA (and other regulators) have taken against firms and associated persons. In October 2013, FINRA highlighted effective practices in identifying and managing conflicts of interest. While we have observed positive change since we issued the Report on Conflicts of Interest. FINRA has also recently announced enforcement actions involving firms failure to adequately address conflicts of interest by offering favorable research in connection with potential investment banking business. 1 We are also reviewing situations where market access customers self-monitor and self-report suspicious trading despite this inherent conflict of interest. And, we continue to focus on fee and compensation structures that lie at the heart of many conflicts and which can at times compromise the objectivity registered representatives provide to customers. FINRA underscores the importance of firms moving to identify and mitigate conflicts of interest. Areas of Focus in 2015 FINRAs 2015 priorities focus on key sales practice, financial and operational and market integrity matters. Before discussing the priorities, we highlight an important issue that cuts across all of FINRAs regulatory programs. Specifically, FINRA has experienced an increasing number of situations where some firms have repeatedly failed to provide timely responses to its information requests made in connection with examinations and investigations. This is particularly troubling as FINRA discusses large and complex information requests with firms and is flexible with respect to due dates, rolling productions, scope and formatas long as the integrity of the regulatory matter is not compromised. These situations are not acceptable, as timely productions of information (as well as oral information through interviews and on-the-record testimony) are critical to FINRA achieving its investor protection and market integrity mission by identifying and shutting down bad practices and bad actors at the earliest possible time. FINRA reiterates firms obligation to respond to FINRA inquiries in a full and timely fashion, and cautions firms that production failures expose firms to disciplinary action. Sales Practice In this section, FINRA discusses product-focused concerns. These concerns may include features of the product itself as well as sales or distribution practices. Some of the products we address are complex and may be subject to substantial market, credit, liquidity or operational risks. In some cases, products previously available only to sophisticated investors have been modified and are now offered to retail investors. These products require firms and registered representatives to perform due diligence, make sound suitability decisions and describe product risks in a balanced manner that retail investors can understand. As always, firms and registered representatives should be attentive to changing circumstancessuch as the precipitous fall in oil prices or the rapid fall in some emerging and frontier market indicesthat may affect suitability decisions and risk descriptions. Training registered representatives about product features, pricing and valuation, and providing guidance around suitability are important steps in meeting these challenges. With these concerns in mind, FINRAs 2015 surveillance and examination activities that include product-related risk reviews will routinely focus on due diligence, suitability, disclosure, supervision and training. Interest Rate-Sensitive Fixed Income Securities The United States has experienced a period of sustained and unusually low interest rates. FINRAs 2014 Regulatory and Examination Priorities Letter detailed FINRAs concerns regarding the interest rate environment and the potential harm to customers holding interest rate-sensitive products that could result from shifts in that environment. Those concerns remain unchanged. FINRA also recognizes, however, that fixed income products play an important role in a well-constructed portfolio. What is critical is that firms communications discuss the impact of interest rate changes on price when marketing products that are interest rate sensitive. In 2015, FINRA examiners will look for concentrated positions in products that are highly sensitive to interest ratessuch as long-duration fixed income securities, high yield bonds, mortgage-backed securities, or bond funds composed of interest rate-sensitive securitiesand test for suitability and adequate disclosures. Examiners may also review firms efforts to educate registered representatives and customers about such products. FINRAs focus on sales practice issues with variable annuities both new purchases and 1035 exchangeswill include assessments of compensation structures that may improperly incent the sale of variable annuities, the suitability of recommendations, statements made by registered representatives about these products and the adequacy of disclosures made about material features of variable annuities. FINRA examiners will also focus on the design and implementation of procedures and training by compliance and supervisory personnel to test the level of brokers and supervisors product knowledge, to prevent and detect problematic sales practices in variable annuities and to assess compliance with requirements that firms file retail communications concerning variable annuities with FINRA within 10 business days of first use. FINRA will particularly focus on the sale and marketing of L share annuities as these shares typically have shorter surrender periods, but higher costs. Alternative Mutual Funds Sales of alternative mutual funds (alt funds or liquid alts) have increased rapidly over the past several years, with hundreds of new funds launched and currently available. Estimates place assets under management in alternative funds at over 300 billion as of November 2014, up from less than 50 billion at year-end 2008. Net inflows for 2014 through November reportedly exceeded 40 billion. 2 Alternative mutual funds are often marketed as a way for retail customers to invest in sophisticated, actively-managed hedge fund-like strategies that will perform well in a variety of market environments. Alternative mutual funds generally purport to reduce volatility, increase diversification, and produce non-correlated returns and higher yields compared to traditional long-only equity and fixed-income funds, all while offering daily liquidity. There is no standard definition of alternative mutual funds, but if a funds strategy involves non-traditional asset classes, non-traditional strategies or illiquid assets, the fund could be considered an alt fund. FINRA recommends firms refer to such funds based on their specific strategies, as opposed to bundling them under one umbrella category. In this regard, firms must ensure that their communications regarding alternative funds accurately and fairly describe how the products work, ensuring that the descriptions of the funds are consistent with the representations in the funds prospectuses. For example, a retail communication that includes a discussion of an alternative funds objectives that is inconsistent with the objectives included in the funds prospectus, or that does not clearly indicate there is no assurance that the objectives will be met, would not meet regulatory requirements. 3 Despite their possible benefits, alternative mutual funds raise concerns when compared to conventional funds. In particular, FINRA is concerned that registered representatives and customers will not understand how the funds will respond to various market conditions or even the strategy in which the funds adviser will engage in various market scenarios. In addition, FINRA has learned that some firms are not reviewing alt funds through their new-product review process, especially if the firm already has an existing agreement with the fund company. Non-Traded Real Estate Investment Trusts (REITs) FINRA identified several concerns with non-traded REITs in last years letter, including general lack of liquidity, high fees and valuation difficulty. FINRA had noted risks to investors who may be attracted to the projected yields of these securities. 4 These risks remain relevant with respect to customer-specific suitability obligations that firms must perform when recommending non-traded REITs to clients. FINRA also emphasizes that firms should perform due diligence on an ongoing basis on REITs they allow their representatives to recommend. Red flags arising from a REITs financial statements or management may cause firms to change the types of clients to whom the firm recommends the product or even to discontinue sale of the product. FINRA also notes that on October 10, 2014, the SEC approved proposed amendments to the Customer Account Statement Rule and the Direct Participation Program (DPP) Rule regarding how these products are valued on customer account statements. 5 Because the offering price, typically 10 per share, often remains constant on customer account statements during the offering period even though various costs and fees have reduced investors capital, FINRA amended the rule to require broker-dealers to provide a more accurate per share estimated value on customer account statements, as well as various important disclosures. Firms that sell REITs should read and understand the full requirements of the amendments in Regulatory Notice 15-02. which also contains the effective date of the rule amendments. Exchange-Traded Products (ETPs) Tracking Alternatively Weighted Indices Indexing has continued to expand beyond traditional market capitalization-weighted methods to alternatively weighted strategies, (e. g. using equally weighted, fundamentally weighted, volatility weighted indices). 6 These indices provide exposure to specific investment risk factors or strategies. Products tracking such indices may be marketed as providing superior risk-adjusted performance relative to products tracking more traditional capitalization-weighted indices. The exchange-traded products market, in particular, has seen significant growth in the use of alternatively weighted indices in terms of products and investor assets. For individual investors, products tracking these indices may be complex or unfamiliar. Moreover, ETPs tracking these indices may be thinly traded and have wide bid-ask spreads, making these funds more costly to trade, in addition to their generally higher expenses. Some alternatively weighted indices may have significantly higher turnover than more traditional indices, leading to greater transaction costs for ETPs that track them. While back-tested results and some academic research have highlighted the potential efficacy and attractiveness of alternatively weighted indices, it remains an open question how the indices and products tracking them will behave in different market environments going forward. Structured Retail Products (SRPs) INRA continues to see firms creating and distributing SRPs, including structured notes, with complex payout structures and using proprietary indices as reference assets. Complex features, long maturities, and linkages to less-traditional or less well-understood reference assets in some structured retail products may present investors with unique or unfamiliar risks. FINRA is concerned that some brokers and retail investors may not be familiar with the complexities of SRPs, compounded by the uncertain impact of a changing interest rate environment. FINRA reminds firms that retail communications concerning derivatives registered under the Securities Act of 1933, including SRPs, must be filed with FINRA within 10 business days of first use. In addition, we are focused on the incentive to increase revenue from structured (and other) product sales through distribution channels that may not have adequate controls to protect customers interests, such as the distribution of structured or complex products through retail distributors that have insufficient expertise to make sound suitability reviews. To mitigate the risk that sales incentives create, wholesalers should have robust Know-Your-Distributor policies and procedures reasonably designed to ensure potential distributors have adequate controls and systems in place. FINRA examiners will focus attention on additional conflict issues that might arise where the distributor and wholesaler are affiliated companies. Floating-Rate Bank Loan Funds These products primarily invest in floating-rate bank loans. While such loans are typically geared to institutional investors, retail investors have increased their exposure to these products through mutual funds, closed-end funds and exchange-traded funds (ETFs) in an effort to protect against the threat of rising interest rates. Despite the promise of hedged exposure to interest-rate risk, these loans can carry significant credit and call risk. In addition, they are difficult to value, have longer settlement times than other investments and are relatively illiquid. As a consequence, funds investing in these loans could face liquidity challenges if a significant number of investors make redemption requests at the same time. Securities-Backed Lines of Credit (SBLOCs) SBLOCs are revolving, non-purpose loans that allow investors to borrow money from lending institutions using fully paid-for securities held in their brokerage accounts as collateral. FINRA has observed that the number of firms offering SBLOCs is increasing and is concerned about how they are marketed. They are now offered by a large number of firms and we see some clearing firms offering SBLOCs to retail investors via their correspondents. Proceeds are typically used to purchase a second home, luxury items or pay other expenses. Eligible securities collateralizing SBLOCs include stocks, bonds and mutual funds that are held in fully paid, cash accounts. Broker-dealers offering SBLOCs should have proper controls in place to supervise these programs. Customers should be fully apprised of program features, including loan restrictions and how changing market conditions may affect their brokerage account and their ability to draw on the SBLOC. Moreover, firms should have operational procedures that enable them to interact with the lending institution to monitor the customers account, keep adequate records and ensure that customers are promptly notified when collateral shortfalls occur. FINRAs new supervision rules (FINRA Rules 3110, 3120, 3150 and 3170) became effective on December 1, 2014. 7 These new rules modify requirements relating to, among other things: (1) supervising offices of supervisory jurisdiction and inspecting non-branch offices (2) managing conflicts of interest in a firms supervisory system (3) performing risk-based review of correspondence and internal communications (4) carrying out risk-based review of investment banking and securities transactions (5) monitoring for insider trading, conducting internal investigations and reporting related information to FINRA and (6) testing and verifying supervisory control procedures. FINRA regulatory coordinators and examiners will contact and inspect their assigned firms to address regulatory questions and become familiar with how the firms are implementing the new rule requirements. Individual Retirement Account (IRA) Rollovers (and Other Wealth Events) FINRA is focused on firms controls around the handling of wealth events in investors lives. Wealth events refer to those situations where an investor faces the decision about what to do with a large amount of money arising from an inheritance, life insurance payout, sale of a business or other major asset, divorce settlement or an IRA rollover, among other events. A brokers recommendations made in connection with a wealth event can have long - lasting consequences for the customer. In 2015, examiners will focus on the controls firms have in place related to wealth events, with an emphasis on firms compliance with their supervisory, suitability and disclosure obligations. Firms systems should be reasonably designed to help ensure that financial incentives to the associated person or the firm do not compromise the objectivity of suitability reviews. Part of FINRAs focus will be IRAs, one of the principal vehicles Americans use to save for their retirement. According to the Investment Company Institute, over one-quarter of Americans retirement savings are held in IRAs and this percentage is growing. Rollovers from employer planssuch as 401(k) plansplay an important role in funding these IRAs. 8 FINRA has stated that, whether in retail communications or an oral marketing campaign, it would be false and misleading to imply that a retirees only choice, or only sound choice, is to roll over plan assets to an IRA sponsored by the broker-dealer. 9 Any communications that discuss IRA fees must be fair and balanced, 10 and the broker-dealer may not claim that its IRAs are free or carry no fee when the investor will incur costs related to the account, account investments or both. If a broker-dealer does not intend for its registered representatives to recommend securities transactions as part of the IRA rollovers of their customers, then the broker - dealer should have policies, procedures, controls and training reasonably designed to ensure that no recommendation occurs. Similarly, if registered representatives are authorized to provide educational information only, a firms written supervisory procedures should be reasonably designed to ensure that recommendations are not made. Without strong oversight, investors may not obtain the information necessary to make an informed decision, and firms may fail to detect recommendations otherwise prohibited by firm policy. Excessive Trading and Concentration Controls FINRA has observed shortcomings in firms supervision of quantitative suitability and concentration, for example, through the failure to supervise for compliance with issuer concentration guidelines (such as those contained in the prospectus for some REITs). 11 In 2015, FINRA examiners will focus on firms supervisory processes, systems and controls concerning how firms monitor for excessive trading and product concentration. FINRA examiners will review the criteria for exception reports firms use and the adequacy of firms follow-up on such exceptions. FINRA has provided firms with practices that may help bolster their supervision of suitability determinations. 12 FINRA examiners will also review customer communications and account activity to determine whether aggressive trading strategies were recommended, and whether broker-recommended transactions, or series of transactions, constitute excessive trading or result in a customers portfolio becoming over-concentrated. Private placements continue to raise concerns and will be an area of focus in 2015. Broker-dealers participate in private offerings in a number of capacities, and common concerns across these capacities include inadequate due diligence and suitability analysis. These concerns remain relevant regardless of the investment sector, investment type (e. g. EB-5 investment funds, pre-Initial Public Offering investment funds, virtual currency funds), or the type of investor. Firms must file most private placement materials with FINRA pursuant to Rules 5122 or 5123. FINRA reviews firms private placements to determine whether broker-dealers performed sufficient due diligence on the issuer and the offering prior to recommendations to customers. We have learned that in some cases, the level of due diligence 1) did not comply with the broker-dealers procedures, and 2) appeared to be inadequate to support a suitability determination. Furthermore, FINRA staff has identified offering documents and communications containing misrepresentations, omissions of material information or inconsistencies with FINRAs communication rules. FINRAs review of private placement filings has also revealed a number of problems associated with contingency offerings and escrow procedures. Pursuant to Securities Exchange Act of 1934 (SEA) Rule 10b-9, a broker-dealer selling an offering pursuant to a contingency is required to return investor funds if the terms of the contingency are not met or have been materially amended. SEA Rule 15c2-4(b) requires broker-dealers to ensure that investor funds are properly segregated. In a number of instances, an offerings terms were amended and a rescission offer was not properly conducted. In other instances, broker-dealers participating in an offering with a contingency failed to either establish escrow procedures or had deficient procedures such as not employing an independent bank as the escrow agent. FINRA also notes that amendments to Rule 506 of Regulation D 13 which, pursuant to the Jumpstart Our Business Startups Act, became effective September 23, 2013permit general solicitation and advertising when offering private placements, provided that all purchasers of the offering are accredited investors. FINRA and the SEC have reminded investors to be prudent when evaluating the risks of these types of investments, especially as, under the new rules, it is expected that investors will be more exposed to private placement sales pitches and advertising. 14 High-Risk and Recidivist Brokers The activities of certain high-risk brokers cause outsized risk to investors, including the heightened potential to become a fraud victim. FINRA devotes substantial attention to brokers that may pose greater risk to the investing public and to quickly stopping those engaged in actual misconduct. To do this, FINRA is expanding its use of data mining, analytics, specially targeted examinations, and expedited investigations and enforcement actions to remove from the securities industry unscrupulous registered representatives who prey on investors. Firms that hire or seek to hire high-risk brokers, including statutorily disqualified and recidivist brokers, can expect rigorous regulatory attention. FINRA will cover all aspects of this topic, including hiring and supervision practices. With respect to hiring, FINRA will review firms due diligence on prospective hires. Examiners will also assess the supervision of high-risk registered representatives to determine whether it is tailored to specifically address the risks associated with the particular individual based on prior misconduct and regulatory disclosures. We will also assess whether a firm implements and documents a stated supervisory plan. Sales Charge Discounts and Waivers FINRA has observed that in some instances customers do not receive the volume discounts (breakpoints ) or sales charge waivers to which they are entitled when purchasing products like non-traded REITs, Unit Investment Trusts, Business Development Corporations and mutual funds. 15 FINRA addressed this issue through examinations and enforcement actions in the last few years and will make it a priority again in 2015. FINRA will determine if firms have an adequate system to ensure breakpoints and sales charge waivers are provided to their customers for products they sell that possess these features. Further, as some products offering volume discounts can have a direct impact on a brokers compensation, FINRA examiners will consider whether brokers disclose that the volume discount is available and make appropriate recommendations to customers. The population of senior investors is large and growing between 2012 and 2020, the number of Americans aged 65 or greater is projected to increase from 43 million to 56 million, and to 73 million by 2030. 16 The consequences of unsuitable investment advice can be particularly severe for this investor group since they rarely can replenish investment portfolios with fresh funds and lack time to make up losses. Reflecting concern about the treatment of senior investors, FINRA recently completed an examination initiative on senior issues. Preliminary findings show that many firms are increasingly proactive in dealing with senior investors by developing specific internal guidelines to strengthen suitability decisions and providing training on the needs of these investors, including, in some cases handling individuals experiencing diminished capacity or elder abuse. FINRA urges firms to review their procedures to identify ways they may be able to improve their treatment of senior investors. FINRA examiners will continue to review communications with seniors the suitability of investment recommendations made to seniors, including with respect to the products discussed above the training of registered representatives to handle senior-specific issues and the supervision firms have in place to protect seniors. Firms that conduct seminars directed to senior investors must ensure that the presentations are fair, balanced and not misleading. Protecting senior investors also means compliance with requirements apart from the federal securities laws and FINRA rules that, for example, require reporting or the intervention of court-appointed guardians when elder abuse is detected. FINRA will focus on certain types of accounts, including Cash Management Accounts (CMAs) and certain Delivery versus PaymentReceipt versus Payment (DVPRVP) accounts. CMAs are brokerage accounts used for activity typically associated with bank accounts. FINRA will review the adequacy of firm surveillance systems and processes to identify potentially suspicious transfers to and from CMA accounts, and to verify the business purpose of activity conducted through these accounts. FINRA will also focus on DVPRVP accounts of foreign financial institutions. FINRA has observed an increase in microcap activity and foreign currency conversion activity in DVPRVP accounts, which may be based in jurisdictions with weak regulatory regimes. DVPRVP accounts may provide less transparency as to the source of the shares being sold. FINRA has observed that some firms are not monitoring activity in DVPRVP accounts for suspicious activity, and are not conducting adequate due diligence to ensure that securities being sold are registered under Section 5 of the Securities Act of 1933 or the transaction is subject to an exemption from registration. FINRA examiners will also focus on the adequacy of firms surveillance of customer trading. Firms should tailor customer trading surveillance around the AML risks inherent in their business lines, products and customer bases. 17 Customer trading activity can involve different types of suspicious activity reportable on Suspicious Activity Reports, including market manipulation, insider trading and microcap fraud. FINRA examiners will evaluate whether firms have systems to monitor for red flags indicative of suspicious customer trading activity. In fact, FINRA has found that firms due diligence in microcap securities for AML and Section 5 compliance is at times inadequate, regardless of whether they receive shares from another broker-dealer or transfer agent, and whether in physical form or electronically. FINRAs continued emphasis on microcap fraud and insider trading is evident through the more than 700 referrals to the SEC and other federal or state law enforcement agencies in 2014, involving potential fraudulent conduct through insider trading, private investment in public equity transactions, microcap fraud and market manipulation. Municipal Advisors and Securities Municipal Advisor Registration In 2015, FINRA examiners will focus on current SEC and MSRB municipal advisor requirements, reviewing for proper application of exclusions and exemptions, and potential unregistered activity. Examiners will adjust their reviews to include new rules as they become effective. 18 In addition to statutory requirements promulgated under Dodd-Frank Act amendments to the SEA, the SECs municipal advisor registration rules became effective July 1, 2014. FINRA has observed through onsite examination and regulatory coordinator outreach that some firms do not realize that the activities in which they engage subject them to municipal advisor registration requirements. Specifically, any firm that provides advice to customers that are municipal entities or obligated persons, whether with respect to an issuance of municipal securities or to the investment of proceeds from such an issuance (or municipal escrow investments) may be required to register as a municipal advisor. The SEC has published a set of frequently asked questions providing guidance about statutory exclusions and rule-based exemptions from the municipal advisor registration requirement. Further, the MSRB has developed a regulatory framework for municipal advisors and is currently developing municipal advisor rules regarding standards of conduct, supervision requirements, professional qualification requirements, pay-to-play, gifts and gratuities, and duties of solicitors. Minimum Denomination Bonds In 2015, FINRA will focus on firms that sell municipal bonds in less than the minimum denomination, in violation of MSRB Rule G-15. Issuers often set high minimum denominations for lower-rated bonds that may make the investments inappropriate for retail investors. Investors who buy the bonds in smaller denominations may find limited liquidity, and thus poor pricing, when they choose to sell the bonds. Financial and Operational Priorities Funding and Liquidity: Valuing Non-High-Quality Liquid Assets Broker-dealers need to develop and monitor funding and liquidity risk management programs. A cornerstone of any such programs is the accuracy of the price firms assign to securities. FINRA has observed that at times firms funding and liquidity plans rely on being able to sell or enter into repurchase transactions at or very near to the prices at which the firms have marked their inventory to market. The issue of mark-to-market pricing is particularly acute with respect to infrequently traded positions in corporate, asset-backed and municipal debt securities. Accordingly, FINRA will examine for the integrity of marks-to-market for such securities and for supervisory controls surrounding the overall valuation process. Sales to Customers Involving Tax-Exempt or Federal Deposit Insurance Corporation (FDIC)-Insured Products Firms that sell tax-exempt securities or FDIC-insured instruments, or products with similar characteristics, should be aware that in certain circumstances firm actions may cause customers to lose the tax-exempt status on interest payments or the FDIC protection they believe they have. These risks can arise if a firm is in a short position with respect to the security (e. g. if a firm sells more securities to customers than it has purchased or holds in inventory, or it has a fail-to-receive allocated to a customer position). In the case of tax-exempt securities, the short position creates a situation where a customer expecting tax-exempt income will, in fact, receive taxable substitute interest from the firm. Similarly, for FDIC-insured certificates of deposit, the firms short position may create a situation where the customers certificate of deposit may be denied status as an insured deposit from the FDIC if the issuing bank or savings and loan association becomes insolvent. Thus, the customer is at risk with respect to both FDIC insurance and with respect to priority of his or her claim in the event of an insolvency of the issuing depository institution. FINRA will examine for the creation and resolution of such short positions, including compliance with the SEA Rule 15c3-3(d) possession or control requirements and the adequacy of supervisory processes in place for the expeditious resolution of these positions. FINRA examiners will review firms approaches to cybersecurity risk management, including their governance structures and processes for conducting risk assessments and addressing the output of those assessments. In January 2014, FINRA initiated a sweep to understand better the type of threats to which member firms are subject, as well as their responses to those threats. FINRA expects to publish the results of that sweep in early 2015. That report will include principles and effective practices firms should consider in developing and implementing their cybersecurity programs, for example, with respect to their overall approach to cybersecurity, the use of frameworks and standards, the role of risk assessments, the identification of critical assets, and the implementation of controls to protect those assets based on the scale and business model of the firm. In addition, FINRA observes that recent events have highlighted the potential adverse consequences of cyber attacks that destroy data. In accordance with SEA Rule 17a-4(f), firms are permitted to store records electronically, provided that the media (p)reserve the records exclusively in a non-rewriteable, non-erasable format. In a 2003 Interpretation to SEA Rule 17a-4, the SEC noted that the rule does not specify the type of storage technology that may be used, but rather sets forth standards that the electronic storage media must meet to be considered an acceptable method of storage. In its 2003 interpretation, the SEC clarified that firms may use integrated hardware and software control codes to store data, provided the electronic storage system prevents the overwriting, erasing or otherwise altering of a record during its required retention period. Given the widespread use of electronic storage media for record storage and the fundamental importance of firms books and records to their ability to conduct business, a cyber attack that permanently destroys data may severely impact a firms ability to continue operating. In 2015, FINRA examiners will review firms approaches to ensuring compliance with Rule 17a-4(f) in the event of a cyber attack. As firms continue to outsource key operational functions to reduce expenses and focus on core business activities, FINRA reminds firms that outsourcing covered activities in no way diminishes a broker-dealers responsibility for 1) full compliance with all applicable federal securities laws and regulations, and FINRA and MSRB rules, and 2) supervising a service providers performance. 19 Outsourcing will be a priority area of review during 2015 examinations, and will include an analysis of the due diligence and risk assessment firms perform on potential providers, as well as the supervision they implement for the outsourced activities and functions. Investor Protection Requires Timely Reporting of Disclosable Information Through its BrokerCheck and Central Registration Depository (CRD ) systems, FINRA provides comprehensive information on firms and associated persons as a key part of its investor protection mission. Investors, regulators and firms rely on this information and depend on it to be complete and accurate. Much of this information is derived from Form U4 and Form U5 registration filings. The FINRA By-Laws require that associated persons of member firms promptly disclose to FINRA reportable U4 and U5 events, including, but not limited to, regulatory actions, customer complaints, bankruptcy filings, liens, judgments and criminal charges. Despite its importance, FINRA has found that in a number of instances firms do not report this information, or do not do so in a timely manner. FINRA is making changes to its registration review process, rules and examination program to address this noncompliance. This includes a public records review of all active registered persons. FINRA will continue this review process on a periodic basis for all registered persons. In addition, FINRA has filed amendments to its Rule 3110 that requires firms to perform public records checks when registering associated persons to verify the accuracy and completeness of initial or transfer Form U4 filings. In 2015, FINRA examiners will review whether required disclosures are complete, accurate and made within the required time periods determine whether firms have controls, processes and procedures in place to ensure timely filings and determine whether public records reviews are occurring. Finally, FINRA expects firms to investigate representatives that fail to report appropriately. Market Integrity Maintaining fair and orderly markets is a central objective for FINRA and is critical to restoring and preserving investor confidence in the U. S. capital markets. FINRA is adapting its surveillance program to identify potentially violative conduct made possible by advances in technology and changes in market structure, (e. g. abusive algorithms .) Firms also must be more vigilant in detecting and preventing misconduct. Firms are well positioned to serve as the first line of defense in identifying bad actors through, among other things, the analysis of market participants activities on their systems. Supervision and Governance Surrounding Trading Technology Maintaining a robust technology governance framework for electronic trading is a key responsibility for broker-dealers. FINRA has identified a number of concerns in this area, and in 2015, FINRA examination teams will review firms technology and related controls with an emphasis on the development and ongoing supervision of algorithms. For example, FINRA examiners will review the adequacy of firms formal supervisory processesand related controlsfor the development and testing of technology changes. Part of this review is a heightened focus on unscheduled trading technology changes that may not have benefitted from offline testing before handling live trades. FINRA examiners also will review the segregation of duties for technology staff performing various functions, namely, developing, testing, deploying, and modifying new and existing technologies. Examiners will also focus on firms risk management and financial and operational controls, with a focus on firms net capital, because the speed with which orders enter the market and are executed, often in numerous symbols on multiple markets, can introduce risk to the financial soundness of high-frequency trading firms. FINRA views abusive trading algorithms and deficient supervision for potential manipulation as among the most significant risks to the integrity of the markets. For that reason, FINRA will continue to pursue firms whose traders or customers use algorithms to manipulate the markets, including through layering, spoofing, wash sales and marking the close, among other means. In addition, FINRA will continue to further enhance its surveillance program to detect new types of potentially manipulative trading activity brought about through the use of abusive trading algorithms. FINRA will also continue to review whether firms supervisory and other controls failed to appropriately detect abusive activity by the firms traders or its customers. Cross-Market and Cross-Product Manipulation Fragmented markets provide opportunities for market participants to disguise misconduct by trading in multiple markets. In 2015, FINRA will continue to enhance both its equities and options cross-market surveillance patterns. FINRAs cross-market surveillance now covers over 99 percent of the U. S. equity markets. Along with identifying potentially manipulative activity by single market participants on either a single or multiple markets, the cross-market surveillance patterns also identify potential relationship trading activity, that is, activity involving two or more market participants apparently acting in concert through one or more markets to engage in manipulative activity. These patterns mark a material step forward in promoting market integrity. With the Chicago Board Options Exchange and C2 Options Exchange outsourcing most of their regulatory functions to FINRA starting in January 2015, FINRA will also now provide surveillance services to approximately 65 percent of the options market. As with equities, FINRA will continue to enhance its cross-market options surveillance capabilities in 2015 by addressing new threat scenarios. In 2014, on behalf of some of FINRAs options exchange clients, FINRA also brought an action against a firm for cross-product manipulation. The case involved multiple instances of coordinated equity and options market activity designed to create momentary, artificial options prices that enabled the trader to purchase or sell options at more favorable prices. In 2015, FINRA plans to continue to expand its cross-product reviews and potentially bring additional actions. Order Routing Practices, Best Execution and Disclosure Last year, FINRA began the process to assess whether trading-fee rebates create conflicts of interest that compromise the execution quality of customer orders. Specifically, FINRA is presently conducting a sweep of firms that route a significant percentage of their unmarketable customer limit orders to trading venues that provide the highest trading rebates for providing liquidity. The concern is that firms may receive inferior executions of their customers unmarketable limit orders because of market movements during the pendency of the orders, while the firm still collects a trading rebate. As part of the sweep, FINRA is in the process of reviewing routing decisions for marketable versus non-marketable orders and how such decisions are impacted by rebates. While the review is ongoing, the assessment has revealed that some firms do not have active best execution committees or other supervisory structures in place to meet their obligation to regularly and rigorously evaluate the quality of customer order executions. We will use the knowledge of our 2014 efforts to enhance our approach in determining whether firms base routing decisions on benefits to the firms without thoroughly evaluating the potential conflicts presented and the quality of execution they receive for customer orders. We have also seen evidence of firms failing to meet their duty of best execution in routing some customer options orders. We have initiated reviews of firms that appear to have ignored a better market on one options exchange to achieve a clean cross on another market. FINRA will continue to review whether options floor brokers meet their best execution obligations and conduct appropriate reviews of the execution quality they receive on their customers behalf. Regarding fixed income, the evolution of market structure and the related expansion in electronic trading of debt securities has contributed to firms having access to improved data and tools to evaluate best execution and mark-ups. In 2015, FINRA will increase its emphasis on reviewing firms pricing practices, including whether firms have the supervision and controls in place to ensure they are using reasonable diligence and employing their market expertise to achieve best execution for their customers and avoiding excessive mark-ups (and mark-downs). In addition, in our fair pricing reviews, we are looking for instances in which firms that are intermediating transactions in structured products may not have disclosed information to their customers about how they would charge the customer. Dealers that position a trade for the purpose of taking a spread when their customer has agreed to pay the dealer an explicit fee for the transaction, should look closely at whether they are meeting the customers expectations about how the dealer should execute the trade and be compensated. Lastly, starting in 2015, FINRA will launch a pilot program to conduct fixed income-based examinations focusing on trading issues, including related controls. As with other trading examination programs, the fixed income program will focus on areas that complement FINRAs surveillance program. Among other things, the fixed income examinations will focus on the operation of alternative trading systems trading fixed income instruments, books and records, supervision and order execution practices. While the four years since the SEC adopted Rule 15c3-5 (the Market Access Rule) have seen improvements in firms risk management controls, we continue to find examples of firms inadequate market access controls in both the equities and options markets related to potential rules violations (e. g. manipulation) and erroneous activity (e. g. erroneous quotes). Similarly, we have observed confusion regarding the applicability of the Market Access Rule to the fixed income markets. We have frequently found that firms have not developed sufficient financial controls around fixed income market access with respect to principal trading activity. FINRA recognizes the control challenges firms face when customers conduct potentially manipulative activity through multiple broker-dealers. Therefore, beginning in 2015, FINRA plans to commence a pilot program to leverage the relationship trading alert activity detected in its cross-market surveillance program to provide firms with information intended to supplement firms supervision efforts with respect to detecting and preventing manipulative trading activity. Audit Trail Integrity FINRA will continue to focus on late reporting in TRACE-eligible and municipal securities that appears to result from inadequate processes and procedures on trading desks. In many cases, firms appear to report larger-sized trades up to several hours late. These delays in reporting potentially affect FINRAs audit trail and its ability to assess whether a firm was at risk when executing a trade. FINRA has created a new team to focus on identifying potential equity audit trail issues not typically detected through routine compliance sweeps and reviews. An important objective of this group is to resolve reporting errors promptly so that surveillance patterns can scan the most accurate data possible, reducing the risk of false alerts and potentially unnecessary inquiries to firms. The team looks at Order Audit Trail System, trade reporting and exchange audit trail data to identify potential reporting errors. Conclusion FINRA urges firms to review their business in light of the concerns addressed in this letter. Serving the interests of the investing public and entities raising capital in a fair manner should be a guiding principle as firms pursue their business in 2015. It is also important for firms to stay current on new and existing priorities and developments as they arise throughout the year. As always, we urge you to contact your firms regulatory coordinator with specific questions or comments. In addition, if you have general comments regarding this letter or suggestions on how we can improve it, please send them to Daniel M. Sibears, Executive Vice President, at dan. sibearsfinra. org .
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