The Global Financial Crisis of 2008 sharply focused the attention of organizations, especially investment banks, on managing their market risk, significantly increasing demand for market risk professionals. Market risk has also transitioned from a support function of the trading desks to an independent function that reports directly to senior risk management.
Market risk analysts work frequently with traders, senior market risk management — who often report directly to the Chief Risk Office, a C-Suite level in any investment bank — and other risk functions, such as credit, model, and liquidity risk. They work closely with other functional areas such as finance, IT, compliance, and treasury to ensure they have all the information they need to monitor market risk in the trading books.
The typical workload is less than a role in corporate finance, and 10-hour workdays are common. This can jump up significantly if a trading limit or regulatory breach needs resolving.
A Typical Day for a Market Risk Analyst
You’ll start your day by ensuring that any limit breaches from overnight trading are urgently investigated and resolved. You’ll then spend the rest of the morning into the afternoon reviewing and monitoring the PnL of specific trading books. You’ll be analyzing how exposed these trading books are to market risk drivers, such as interest rate risk, FX risk, equity market risk, and liquidity risk, to prevent any breaches of trading limits.
Later in the afternoon, you may review Value at Risk, or VaR, reports, the critical market risk metric. Regulators use VaR to measure market risk exposure, as well as used to guide internal operational decision-making.
Once the market closes, you will need to review the final positions of the trading books.
You might wrap up your day by reviewing internal market risk models the bank has developed to alert traders to additional risks that might be building in trading books, such as concentration or liquidity risks.
Periodically, you will work with your team to perform stress tests on trading books so that the trading desk and bank can withstand a sudden market shock, like a currency devaluation or a high profile and sudden bankruptcy, such as Silicon Valley Bank in March 2023.
Market Risk Qualifications and Experience
Investment banks now have specifically designed risk programs designed to onboard graduates into risk roles, such is the importance placed on risk management in general. A finance or economics degree or postgraduate degree is typical of graduates hired into market risk roles. Majoring in a quantitative area such as econometrics will put you in the crosshairs of recruiters. Other degrees such as mathematics, statistics, computer science, and engineering degrees are also relevant.
People in the finance industry with little to no market risk experience who want to move into market risk must demonstrate a deep understanding of financial markets. Having acquired a CPA qualification will reflect well, as would having knowledge and experience in regulatory frameworks that affect market risk, such as Basel III, Fundamental Review of the Trading Book (FRTB) in Europe, and Dodd-Frank in the US.
Strong Excel skills are a must, whether you are entering a market risk role at the graduate level or looking to move into it from an experienced hire perspective. Computing skills such as Python and SQL are increasingly sought. Working in market risk does require a degree of mathematical and quantitative ability. Still, a lot of the heaving lifting is done by quants, so the ability to interpret information is more critical than the skills needed to derive the information.
While the quantitative aspect is critical, qualitative skills are also vital, partly due to the number of stakeholders you will be collaborating with and partly due to the nature of the work. Attention to detail, the ability to work collaboratively with colleagues, and communication skills, especially in managing challenging conversations, are all critical attributes of successful market risk analysts.
Compensation and Career Development in Market Risk
Market risk compensation varies depending on the bank (some banks pay more than others), location, and experience. Analysts can expect to earn salaries close to sales and trading analysts, although the bonus structure will likely be less. With the increased emphasis on market risk management within banks, there are opportunities to progress to the director and managing director levels, where compensation can be very rewarding.
There is tremendous scope to build a career within market risk, especially if you want to work and live in a major financial center such as London, New York, or Singapore. Moving to different desks allows you to learn a whole raft of new skills and knowledge, as the market risk characteristics of the equity futures desk are very different from the market risk of the interest rate swap desk. The technical and market knowledge acquired while working in market risk is very transferrable within investment banking, asset management, and private equity.
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