Managing a loan or bond portfolio is a far cry from what it used to be, thanks to recent market developments such as the rapid growth of credit derivatives.
In fact, the changing ways of the credit portfolio management business - and the ensuing need to acutely manage risk - has prompted the International Association of Credit Portfolio Managers (IACPM) to draft a set of guidelines to help credit portfolio managers execute their increasingly complex investment duties. The IACPM has released the new guidelines, known as Sound Practices in Credit Portfolio Management, in an effort to provide those in charge of their firm's risk management with a benchmark against which they can measure their risk management practices. The sound practices cover a range of issues such as the valuation of assets and gauging vulnerability to extreme events.
Ivan Marcotte, the IACPM's newly elected chairman, said the new document is titled "sound practices" rather than "best practices" because it is intended to provide a framework off of which portfolio managers can work, not to prescribe the best way to manage a portfolio.
"The sound practices are really an attempt by the industry to set down an outline of what people can expect from a portfolio management program, as well as identifying some of the key elements of a successful portfolio management effort," explained Jim Lentino, managing director at ABN Amro and chairman of the 22-member committee that drafted the document, in a statement.
The organization set forth 30 "sound principles" under 11 different categories, which cover topics such as "standardize risk measures and models," "understand economic value versus accounting value," "align accounting conventions with portfolio management practices" and "set limits and manage concentrations."
For example, one of the sound practices addresses how a loan's mark-to-market value may not be the same as its amortized cost. The IACPM suggests that, for the purposes of internal management accounting, credit assets should be marked to market to assess the economic value of the asset.
Marcotte, who is a senior vice president and risk management executive at Bank of America, said the guidelines have been in the works for about 18 months. He noted that a lot has happened over this period, causing the IACPM to address several recent developments in the document as well. The rapid growth of the credit derivatives market, the growth of index products and the institution of the Joint Market Practices Forum have altered the playing field for credit portfolio managers greatly, Marcotte said. The Joint Market Practices Forum is a consortium of industry associations that have introduced guidelines for the handling of material nonpublic information. This group has moved a lot of decisions to the public from the private side of the information wall, he noted.
In order to further support the advancement of credit portfolio management, the IACPM plans to remain in close contact with key regulators in its industry. Marcotte said the organization has already met with regulators such as the Federal Reserve Board, the Office of the Comptroller of the Currency and the U.K.'s Financial Services Authority to support this goal. "[Our] field has changed a lot over the last five years, and we feel we need to spend time in front of the people who regulate us," he explained.
The changing face of credit portfolio management is also driving the IACPM, which started out as an informal group of roughly eight or so U.S. commercial banks, to expand and diversify its membership base. Since its formation in 2001, the IACPM has grown into a 59-member international organization. The group's membership includes US, European, Australian and Japanese banks.
And while the group's membership base chiefly consists of commercial banks, as well as some investment banks and insurance and reinsurance companies, one of its top goals for the coming year is to expand that membership to include non-bank members such as institutional investors, Marcotte said. This would include collateralized debt obligation and high yield fund managers.
"It makes sense to broaden the membership," he said, noting that the general principles behind asset management are the same for institutional investors as they are for banks. The IACPM is looking to extend its membership to those in the retail loan and consumer credit card industry, as well as to those involved in credit default swaps of asset-backed securities, Marcotte noted.
In addition, the IACPM is looking to expand its focus on the middle market. While the organization's first members were primarily those that managed portfolios that contained assets from Fortune 500 companies, that has since changed. "We've gotten a lot more members interested in the middle market," Marcotte said, noting that the organization has set up a group to look at how to bring liquidity to the US middle market, and to the comparable small and medium enterprise loan market in Europe.
(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.