Melissa Sexton, CFA is the head of Product and Investment Risk for Morgan Stanley MS -0.33% Wealth Management. Prior to this, she spent nearly a decade serving as Chief Risk Officer at two different hedge funds in New York. Most of Melissa’s 25 years of experience has been in a variety of risk management roles, though she has also traded derivatives and worked in operations, and has continuously worked on projects which integrate risk management with information technology. Ms. Sexton is a member of PRMIA New York’s steering committee, received a BA in Mathematics and Economics from Boston University, and was awarded her CFA charter in 2001.
Christopher Skroupa: You started your career in risk management in the 1990s, a decade notable for rapid changes in information technology combined with extraordinary growth and development of financial products. How have these changes affected the risk management function over your career?
Melissa Sexton: The changes have been significant and continue to be. When I started in the field, the most sophisticated financial instrument was an exchange-traded option – a standardized product with fully transparent pricing and contract terms. Software for standardized products can be commoditized and developed fairly quickly, but products with multiple triggers and non-standard underlyings meant that technology and risk models needed to be flexible and much more complex. And risk managers needed to be knowledgeable not only about valuation models and the nuances of different financial markets, but needed to have more of an enterprise view of risk. The risk function in the early nineties was largely focused on managing market and credit risks, but the massive growth of over-the-counter (OTC) derivatives, also known as off-exchange trading, led to increased counterparty, operational and liquidity risks. It also led to a need for enhanced Know your Customer (KYC) controls, which support a business in verifying the identity of its clients, to manage reputational risk.
Skroupa: Can you compare and contrast your previous role of chief risk officer at a hedge fund with your current role managing investment and product risk at a large, complex organization like Morgan Stanley Wealth Management?
Sexton: In many ways, the roles are quite similar because most risk management positions require a blend of quantitative and financial expertise, technology and communication skills. It will always be essential that risk managers are able to influence behavior. But the biggest difference I experienced while working at hedge funds was the emphasis on stress testing and liquidity risk management – both fund liquidity and asset liquidity. This is because of the higher leverage employed in most hedge fund strategies and the prevalent use during the financial crisis of gate provisions, which limited the amounts clients could withdraw from funds. I worked closely with clients during this hectic period which gave me insights into their unique needs and circumstances.
At Morgan Stanley Wealth Management (MSWM), we are also focused on individual client needs and circumstances, but the size and scale of this business differs materially. With more than 16,000 financial advisors and approximately $2 trillion in client assets, we need to focus on clients and their accounts, but also financial advisors, financial markets and the multitude of investment products and solutions we offer.
Skroupa: With the immense amount of data available, what steps has the firm taken to turn all of that data into meaningful information? How is risk management using this data?
Sexton: MSWM had great foresight when they decided several years ago to build a massive data warehouse that is integrated and accessible and has a time dimension for analyzing trends over time. We in risk management are naturally huge consumers of this data and like many firms, we are embracing big data analytics. With so many variables to consider and an abundance of risks to measure and manage, we are increasingly looking to combine data mining techniques, statistics and programming to help us prioritize our efforts and communicate meaningful information to senior management. We still have a lot of work to do in this area, but as the type and amount of data increases and computer processing time decreases, it’s exciting to be at the forefront of developing such advanced technology and I believe we will be able to make better decisions as a result.
Skroupa: Your firm is regulated by multiple agencies including Finra, SEC, Fed and OCC, and even President Obama recently weighed in on fiduciary standards. Can you elaborate on the current regulatory environment?
Sexton: I think our interests are aligned with the regulators and that we face similar challenges and opportunities. As part of the broker-dealer, our primary regulator is Finra, but all the different agencies with their different perspectives and jurisdictions are involved in the different businesses at Morgan Stanley. In my group, we are focused on investment risks arising from discretionary asset management activities and enhancing supervision of complex products. These are hot regulatory topics, but we need to focus on them anyway as our business changes. Just as we saw in the 1990s with the growth of OTC derivatives, products and solutions now available to retail clients have more complicated features and therefore require more scrutiny and management.
I think the regulators are also relying much more heavily on data and analytics. They now have access to much more information, and not just from banks and systemically important asset managers and insurance companies, but also from hedge funds and private equity firms, as many are now required to file Form PF (Private funds) to the SEC. I do hope that all of the different regulatory agencies are working together to share data and build data warehouses and advanced tools so that they can leverage all of this data to form a more complete view of risk across the global financial system.
Serhat Cicekoglu, Director of Loyola University Chicago, Quinlan School of Business, Center for Risk Management adds: “As business processes become more complex, increasingly dependent on data and faster due to improvements in technology, the role of risk managers becomes challenging. The role now depends heavily on savvy big data techniques that can be applied to their core responsibilities while a segment of their stakeholders lack the necessary skills to fully grasp the complexities of this rapidly unfolding capability. Today, a lack of tools and educational programs focusing on the application of big data techniques in the field of enterprise risk management makes this even more difficult, limiting the supply of high-demand talent.”
On March 20th, 2015, Loyola University Chicago will host, “New Legal and Regulatory Terrain for ERM: Outlook for Companies and Risk Managers.” Continue the discussion with Melissa Sexton, Serhat Cicekoglu, Director of Quinlan’s Center for Risk Management and a select group of risk managers, risk consultants, academics and legal experts. To inquire about attending, contact Chris Pulliam at firstname.lastname@example.org.