One year after Barings PLC shocked investors worldwide with more than $1 billion in derivatives-linked losses, institutions are continuing their efforts to boost their risk control systems.
Institutions that have appointed risk management executives, or assigned risk control responsibilities to a specific executive, include: GTE Investment Management Corp., Stamford, Conn.; General Motors Investment Management Co., New York; the pension fund of IBM Corp., Stamford; Fidelity Investments, Boston, and HSBC Asset Management Ltd., London.
And, industry participants say, the need to control all aspects of investment risks has been underlined especially at the custodial level.
But some in the industry say institutional investors haven't seen the last Barings, because occasional huge losses are just a part of doing business in the investment world.
"Barings brought to the surface an underlying problem that will take a lot of time to fix," said Ron Peyton, chairman and chief executive of pension consultant Callan Associates Inc., San Francisco. Barings underlined the fact that "your custodian could be your largest money manager," he said.
Through securities lending and cash management operations, custodians have investment oversight of large amounts of pension assets, he said. Prior to Barings, awareness of and interest in the monitoring of a custodian was limited, he said.
"Detailed knowledge of those operations just didn't exist," he said. (Barings acted as a custodian and money manager to U.K.-based pension funds).
Some in the industry say Barings had significance only in the context of other investment surprises at other institutional investors.
"We view Barings as one of a series of major earthquake....in the pension landscape the last few years," said Stephen L. Nesbitt, senior vice president for Wilshire Associates Inc., a Santa Monica, Calif., pension consultant. Mr. Nesbitt said the Barings situation falls into a group of disasters that includes the securities lending-linked losses at Harris Bank, Mellon Bank and the Common Fund.
Barings didn't start anything and didn't finish anything, but it reinforced the need to look at all of the risks in a pension fund, he said.
Edward Tokar, vice president-investments AlliedSignal Inc., Morristown, N.J., said Barings "is just one of many examples" of how important it is for investors to check and double-check that assets are being managed as expected.
There is "less reliance on words that say everything is OK," he said.
He said AlliedSignal's pension executives reviewed its procedures and controls but didn't make any changes.
As a result of heightened concerns about risk, Roland Machold, director at the New Jersey Division of Investment, Trenton, said pension managers have taken a "nuts and bolts" approach to controlling and monitoring risk at their fund.
Mr. Machold said New Jersey's executives are taking a closer look at controls. While not a direct result of Barings, the division at one point refused to buy certificates of deposit from Japanese banks because of concerns about undisclosed or undiscovered risks in the Japanese banking system.
People are working harder to make sure financial controls are in place and are trying to minimize the risk of accidentally losing a large part of their assets, he said.
Edgar Barksdale, president of RCB International, a Stamford, Conn., manager of managers, said, people "are doing their due diligence more diligently," particularly when derivatives are mentioned.
"The net effect: there's a lot more discomfort with derivatives that has nothing to do with their fundamental character," he said.
But Paul Rudinoff, director-risk management for General Motors, said the industry's reaction to Barings has been superficial.
"Basically, it wasn't a major event," Mr. Rudinoff said. Without having direct knowledge of the situation, he said his impression is that Barings' management knew there were problems in its Singapore trading operation. But because it was making a lot of money, it didn't pursue the problems vigorously.
Ensuring the separation of investment and clearing duties may be the most enduring legacy of Barings, industry participants say.
Beyond that, many investors have tightened investment guidelines, and pension funds and money managers have added risk management positions.
John Carroll, president of GTE Investment Management, said that both Barings and the Common Fund loss taken with First Capital Strategists opened the eyes of sponsors to the potential for unexpected risks taken by outside managers. GTE's new risk management position was prompted in part by losses at both institutions.
Mr. Carroll said that going forward, "there's going to be more scrutiny paid by plan sponsors to their (outside) managers." Sponsors have been finding that perhaps not all of their managers paid as much attention to risk management as they do, he said.
Mr. Rudinoff of GM said his new role wasn't a result of any investment disaster, just an outgrowth of a corporate policy of formalizing risk management companywide.
FMR Corp., holding company to Fidelity Investments, Boston, recently named James Lam vice president of global risk management and chief risk officer. He is responsible for ensuring the best practices are in place for measuring and managing all types of risks for Fidelity's businesses, including operational risk and control, credit risk and market risk.
Likewise, Neil Brown, who was named head of global risk management at HSBC last fall, said his position wasn't an outgrowth of Barings, only an extension of consulting work he had done for HSBC.
He said that while Barings has slowed use of derivatives, it hasn't stopped completely. Investors that were close to starting a derivatives strategy are the ones who stepped back, he said.
But not all investors have started to formalize a risk management process.
"A lot of pension funds don't necessarily recognize some of the risks their managers are taking," said Andrew Lese, vice president for Emcor Risk Management Consulting, Irvington, N.Y.
He said problems can develop when a manager makes a change in style or strategy. In one instance, a money manager he declined to name sent a letter outlining a change in strategy for pension fund, announcing it would use swaps for sector management and start using options. Exactly what the manager was trying to do was not clear in the letter, he said.
"It's a continuing evolution," and Barings was the one that "woke up financial institutions" to the possible consequences of taking on unintended risk, he said.
And despite all the effort to prevent another Barings, nothing is 100% preventable.
Mr. Lese said that as markets become more efficient and sophisticated, there will be new types of risks for investors to manage. So trying to prevent another Barings is an unending battle.