The main objectives of risk management
- Analyze and manage all risks (financial, human, information system, strategic, etc.) in order to avoid the adverse effects of operating in "silos" and all the potential impacts of these risks (financial and non-financial impacts such as reputation, know-how, etc.).
The scope of the analysis is the FRR and its stakeholders, its custodian-account keeper (Caisse des Dépôts), external managers, index providers, and other service providers.
One of the advantages of this approach is that it aggregates all major risks and ensures the overall consistency of risk analysis and action plans at the organizational level. - Alert the Executive Board to the possible occurrence of major risks and risks deemed unacceptable.
- Propose and coordinate the implementation of action plans to reduce and/or change the profile of these risks.
- Help disseminate best practices and a culture of risk management within the FRR.
- Provide the Board of Directors with independent advice on the management indices chosen by the FRR's finance department for its own management activities.
- Propose or approve risk limits by major risk category or business area.
- Analyze new investment processes from a financial and operational risk perspective prior to launch. Set limits for these new investment processes.
The Risk Committee
Skills
- The committee deals with all financial and operational risks. It meets monthly and may be convened on an ad hoc basis.
- It analyzes the main risks to the FRR's portfolio and organization, based on reports on performance, financial risks, compliance, and operational risks. These reports are produced by the financial risk management department and the operational risk manager, independently of financial management.
- It examines new financial investment proposals from a financial risk perspective and defines the risk and prudential frameworks applicable within the FRR.
- More generally, it ensures the dissemination of risk management culture and the implementation of best practices and methods within the FRR.
- The Risk Committee reports directly to the Management Board on these decisions and analyses, which are recorded in minutes presented during Management Board meetings.
Members of the Risk Committee
- The committee is chaired by a member of the Executive Board.
- The Directors of the FRR and the heads of departments are members of the Risk Committee.
- The committee's secretariat is provided by the Risk Control Department, with contributions from all departments as needed.
The financial risks of the FRR
Asset/liability management risk
The FRR constantly monitors compliance with the prudential rules to which it is subject (rules derived from the 2001 law).
This regulatory framework is accompanied by additional internal rules.
Credit risk
Within fixed-income mandates, minimum rating requirements are imposed on managers. With regard to short-term securities investments for cash management purposes, the FRR must comply with both rating constraints and the issuer's capital requirements (or GDP level in the case of a government).
Counterparty risk
The FRR selects a large number of external managers to manage its asset portfolio. A rigorous selection process involving public tenders, in-depth due diligence checks on managers, and regular monitoring (including a monitoring process where necessary) help to reduce this risk.
backup solutions are also available in case of difficulties, particularly at the management level.
Counterparty risk
For hedging purposes, the FRR, through its managers, negotiates over-the-counter derivatives with banking counterparties. It imposes minimum ratings (Moody’s, Standard & Poor’s, and Fitch) and minimum capital requirements on its counterparties.
The FRR also requires margin calls to be put in place for certain derivatives, in addition to compliance with maximum exposure limits per counterparty. A monitoring system comprising alerts, risk indicators, and periodic reports on these active counterparties is in place.
In addition, the settlement risk for all forward foreign exchange transactions with banking counterparties is greatly reduced because the FRR uses the services of CLS Bank. CLS acts as a trusted third party and only settles between two counterparties after performing all checks and clearing the transactions.
The risk of delivering currency to a defaulting company that cannot honor its payment is therefore greatly reduced.
Currency risks
Part of the FRR portfolio is invested in foreign currencies. With regard to the performance portfolio, the Fund has hedged 90% of its currency exposure through forward currency contracts that are renewed periodically, with the exception of its positions in emerging market currencies, for which the upward trend in currency values is a factor in overall medium- and long-term performance.
With regard to assets covering liabilities, the coverage ratio for currency exposure rose to 100% in 2011.
This hedge statistically improves the risk-return ratio for developed-market currencies because it reduces portfolio volatility without significantly impacting net performance.
Short-term financial risks
They are divided into two levels:
- Absolute risks: these are the absolute losses that the FRR may incur in the short term. Estimates of these short-term loss levels are produced regularly by the Fund's teams.
- Relative risks: this refers to a manager's underperformance relative to their benchmark index. This relative loss is governed by the definition of a maximum ex ante tracking error risk budget that must be adhered to.
FRR operational risks
Compliance risk
The FRR constantly monitors compliance with the prudential rules to which it is subject (rules derived from the 2001 law). This regulatory framework is supplemented by additional internal rules.
Data risk
Performance and risk calculations, and therefore investment choices, depend on the quality of the data fed into the FRR's information system.
Supplier risks
The FRR selects a large number of external managers to manage its asset portfolio. A rigorous selection process involving public tenders, in-depth due diligence checks on managers, and regular monitoring (including a monitoring process where necessary) help to reduce this risk.
backup solutions are also available in case of difficulties, particularly at the management level.
The risk of business interruption
In order to best safeguard the assets entrusted to the FRR by the national community, the FRR is required to monitor the financial markets on a daily basis due to their volatility, so that it can act quickly if necessary.
In fulfilling its mission, it is therefore of paramount importance that the FRR be able to continue its activities for several days in the event of serious incidents (pandemic, flooding, fire, etc.).
Contingency and fallback plans have been defined and are regularly tested to prepare for these eventualities.
The risk of fraud and money laundering
The FRR pays particular attention to the choice of its investment vehicles so as not to contribute to fraud or money laundering practices.
