Michelle McCarthy, Managing Director and Director of Risk Management at Nuveen Investments talks to DerivSource about the balancing act risk managers must contend with and the lessons she has learned in her risk management career thus far.
Q: What influenced you to pursue a career in finance?
A: My decision to pursue a career in finance was very accidental in the beginning. When I was a student, I got a part-time job working in a college student loans agency updating spreadsheets and I really enjoyed it so I thought I’d try out finance.
Q: Can you describe your responsibilities working at Nuveen as a Director of Risk Management?
A: My current role involves measuring investment risks and putting policies around investment risks for Nuveen’s seven boutique affiliate firms. Within our multi-boutique model, each affiliate has their own distinct identity, culture and investment philosophy and process, but together, they roll up into one company, sharing certain commonalities across the affiliates.
Q: What has been your biggest challenge or lesson learned so far?
A: I have worked in risk management in both the banking and the asset management sectors. In an earlier role I faced one of the biggest challenges of my career. At a previous firm, decisions were made to increase credit risk at a time when the housing markets were at an all time high and rates were at an all time low, and a number of people disagreed with that decision. The board and senior management team can try to influence a decision but once that decision has been made, it is a matter of executing it as correctly as possible, and regardless of one’s personal assessment. That is a very difficult position for a risk manager to be in.
Q: Through your years of experience, do you find that you’ve now got a balance between risk responsibility and orders?
A: A risk manager is not there to stop all business but you are there to make sure the business supports the firm’s strategic goals. That is the balance you have to strike in this role.
Q: How have your past roles helped your transition into your current role?
A: I have been a risk manager since 1991, so every year new issues come along that improve and deepen my understanding of what is needed. Some of my earlier experiences of things going badly have proved to be the most useful for my role and I think that a risk manager who enjoys a career in a successful financial institution with no errors, or problems, probably hasn’t learned very much.
There was one case early on in my career where the data used to measure how much market risk a firm was taking came from a blend of front-office systems and back-office systems. Somebody on the front office accidently erased the way his positions came across in the feed to me so I understated his risk and of course, the trade that was being suppressed lost money.
At that time, it became crystal clear to me that you need the same kind of audit trail and scrutiny for risk data. It is a form of books and records of how much risk you are taking and it has to be treated as such. Risk data should not have passed through the hands of front office. Official risk reports should not be something that the person trading the book contributes to any more than they should be the source of their own P&L.
Q: Did you make any major changes as a result of this incident?
A: From that point forward, the routing of all the data that came into my risk measures went through the back office even though it was a difficult task because the back office systems typically only support what accountants need, and the accountants do not need to know the duration of a bond but I do. However, you can get all the ingredients you need for risk measures from independent sources that cannot be manipulated by people who are taking risks. I started as a risk taker, but it is important to have my risk assessment data separate from those roles to ensure there absolutely no conflicts of interest.
Q: Did you enjoy your role working on financial regulation? And are you involved with any other industry associations?
A: In the early 1990’s the Bank of England selected a group of 20 practitioners to work with the Bank of England to work out the market risk elements of Basel I and I participated in that group. At the time it was not as recognized and followed by the broader market, but clearly is now, so it was a great opportunity for me to be involved in at the time.
I currently serve on the board of the Global Association of Risk Professionals (GARP). I’ve been involved with the association since 2000, but have now served on the board for about five years. I have also served on the GARP committee that works on their accreditation exam and have acted as head of their local chapter in Seattle and now in Chicago. The association aims to better represent the work and concerns of risk managers. This role presents welcome opportunities to meet with regulators and to create coursework to help risk management departments educate their staff, which is extremely important because there is probably more demand than supply at this point.
Q: What advice would you give to others who are looking to progress their careers in risk management?
A: Having worked as a portfolio manager and derivatives trader has really helped me in understanding market risk management. It is a great experience to have before you go into the role of setting policy around portfolio management because it is easier to understand multiple issues from varying points of view if you have experienced them personally. A customer sales role in derivatives products is useful too because it helps you understand the context of how those instruments are used in the real world and the impact on clients. Some people who have not worked in these types of roles can find it difficult to understand the strategies people are using. The practicalities of working as a risk taker really helped me because if you learn it academically it is incredibly confusing—the jargon alone is really complex—and you may be limited in fully appreciating how risk truly plays out in the market.
Q: Has there been an event or change you have made that was instrumental to your career progression?
A: Moving abroad and working in different geographic locations was huge for me. I moved early in my career and I did a lot of lateral transferring but it was very useful for me and my career because I learned a lot.
Q: What do you enjoy about most in your career thus far?
A: Working at two distinct firms earlier in my career provided me the opportunity to learn that leadership in a firm can really make a difference. At one firm I worked for, they were very smart about their own risk, but had a lack of sensitivity around customers, which is what killed them as a firm. At a subsequent company, I found they were really smart about their customers but they were not great putting their oxygen mask on first and taking care of their own risk. Either way can kill a firm so it is a matter of a balance between the two – being smart about your risk and being intelligent about your customers.
You can try and do rewarding work in any profession. If you try and do the right thing for shareholders in a mutual fund or for customers of a firm, it is just as good as doing the right thing in other occupations.
Q: What would you do professionally if you hadn’t followed the path you’re on now in risk management?
A: I would have either been a professor of political science or I would have gone into the foreign service. I studied political science and foreign languages in college including French, Italian, Spanish, German, Russian and a little bit of Swedish once I got into banking.
I thought I was going to have a foreign service career but instead I had an international banking career. At first I felt guilty because I was not in an occupation that could save the world but the things I learned in the social sciences applied really well to business because it all comes down to analyzing data and making smart decisions.