Editor’s Letter : Risk and Reward

For many companies it took some considerable regulatory prodding before they recognized risk as something they could not only quantify, but that they could manage. Much like environmental awareness, risk management for most businesses was as much about presenting the right image and complying with regulations as it was about, well, managing risks.

Now, as we find out on page 22, more and more companies are appointing chief risk officers as they discover the real, commercial benefits of risk management.They are realizing that the key,as with environmental awareness and corporate responsibility, is to ensure that a corporations risk management effort doesnt only have a face: it must also have teeth.

Talking of risk, Citigroup took a fairly big one with its daring play on the eurozone government bonds market last month. In the space of a couple of minutes, Citigroup sold 11 billion worth of bonds, which, not surprisingly, triggered a brief panic in the market and knocked the bond prices off a cliff.About half an hour later,while other players in the market were still trying to work out what was going on, Citigroup waded boldly back in and snapped up around 4 billion of the same bonds at the new, depressed prices. Its profits on the trades may have been as high as 20 millionnot bad in such a low-margin business.

The move prompted a storm of protest from bond dealers and a surprisingly petulant reaction from the trading platforms owner,Italy-based MTS, which imposed limits on the sizes and frequency of trades.Those who complained about Citigroups smash and grab raid felt they had a valid point but in reality they were simply saying that it just wasnt fair for a big, sophisticated bank to use its muscle and technological expertise to make money at other peoples expense. Of course, that is precisely what a big, technologically advanced organization such as Citigroup should be doing.

Few players in any of the electronic markets would argue that greater liquidity is a bad thing and Citigroups extraordinary trade was simply the result of a global giant taking advantage of both its own size and the speed and liquidity of the market.To restrict trading in electronic marketplaces is self-defeating. Sure, competing against the likes of Citigroup in such markets is tough.Anyone who finds it too tough, though, should be probably be thinking about a career change.

Until next month,

Dan Keeler

dan@gfmag.com