AUIM has ingrained a strong risk management process into its investment framework. There are three lines of defense. The 1st line is essentially managed within the Investment Management organization (Front Office). This includes:
Traditional and distressed credit research efforts:
AUIM feels the combination of a traditional research effort and a distressed research effort provides an additional measure of underwriting scrutiny into the credit review process. This in turn allows AUIM to have a better understanding of the fundamental downside in credits throughout the portfolio and allows AUIM to make more grounded risk/reward decisions. These processes are a collaborative effort and involve professionals such as portfolio managers, traders, and credit research analysts.
Measurement of Risk/Return Metrics:
AUIM’s state of the art technology allows for desk top access to a variety of risk related metrics during the portfolio management process. The primary tool is Blackrock’s Aladdin system which provides desk top access to a variety of risk measures including portfolio positioning information, tracking error information, VAR and the ability to measure portfolio risk relative to the benchmark under a variety of market scenarios already established in the system. In addition, the system allows for customization of those scenarios in order to more fully incorporate AUIM’s broader market outlook. This process is facilitated by an independent Portfolio Risk Management (“PRM”) group within AUIM, and is regularly reviewed with portfolio managers and other members of the senior Investment Management team. PRM is also involved up front with the approval of new products and client mandates, as well as helping set appropriate risk parameters and limits to ensure consistency with desired risk appetite for AUIM and/or client. PRM continuously partners with other Front Office investment professionals to identify evolving risks to the portfolio and appropriately quantify and assess those risks.
The 2nd line of defense is designed to provide an additional layer of control with a focus on independent monitoring and reporting. Much of these activities are done with AUIM’s Back Office and Finance functions and include:
Monitoring of Risk limits (Compliance):
AUIM has an independent Portfolio Risk Control (“PRC”) Team that electronically monitors client restrictions and guidelines via the Blackrock Aladdin System. AUIM utilizes the Blackrock Aladdin pre-trade compliance system as well as Compliance Dashboard, a workflow tool, function to monitor client guidelines post-trade and to prevent trades which might violate a particular client’s guidelines. Pre-trade compliance restrictions require a manual override by an authorized compliance person in order for the trade to proceed. Post-trade compliance is monitored by PRC on a daily basis, and when necessary, portfolio managers are involved to resolve compliance issues. Portfolio Managers are immediately notified of breaches of guidelines and are required to log in the Dashboard an explanation of why the violation occurred and a plan of action to remedy the breach.
A report that documents Compliance violations, including the asset class trading capabilities compliance restrictions, is reviewed monthly by a senior member of the compliance team. Serious and/or repeat violations are reported to AUIM’s Risk and Control Committee for determination of further actions.
As required by the SEC rules and regulations, AUIM utilizes a variety of compliance procedures to detect and prevent compliance violations and to assure compliance with a particular portfolio’s investment objectives, policies and practices. For example, fair allocation, best execution, Anti-Money Laundering, Business Continuity Plan, Books and Records, Code of Ethics, Trade Errors, and Pay to Play.
Risk Assessment (Compliance):
AUIM’s compliance team provides compliance risk identification, assessment, independent monitoring and reporting to AUIM senior management. Monitoring occurs throughout the year. Quarterly reports are provided to senior management through the use of the Risk and Control Committee. AUIM also has an annual review of its compliance program which results in an annual review report that is provided to senior management.
Risk Assessment (Operational Risk):
Finally, AUIM’s Operational Risk Management (“ORM”) team is responsible for identifying and assessing operational risks, monitoring the effectiveness of the internal controls developed to mitigate unacceptable risks and reporting to senior management on the results of monitoring efforts. Reports are completed quarterly and provided to the Risk and Control Committee.
The 3rd line of defense is independent assurance outside of AUIM that policies and procedures are operating as designed and that unacceptable risks are appropriately mitigated. This is also designed to assess the overall effectiveness of our risk management and internal control culture, governance, and structure. The following areas offer this assurance:
AEGON USA Internal Audit:
AEGON USA Internal Audit provides audits of various AUIM functions throughout each year, such as public fixed income, derivatives, performance, etc. The audit reports are issued to senior management within AUIM as well as to AEGON USA’s Audit Committee. High inherent areas are audited on a cyclical basis with the typical cycle being every two to three years. However, several factors including the results of a prior audit could change the cycle to annual basis.
External auditors:
External auditors, in conjunction with the annual audit of AEGON NV, review various areas within AUIM, including trading, derivatives, operations and finance. An audit report is issued to the senior management of AEGON NV and the Audit Committee.
AUIM has a fully implemented SOX program which focuses on financial controls. This program has risk assessments, monitoring and testing components which provide AUIM senior management with further assurances that financial controls are designed appropriately and operating effectively. External auditors provide attestation regarding the financial internal control environment with respect to the SOX program as well.
In addition, there are regular Risk and Control Committees at an overall AUIM-level and specific process levels where these topics are reviewed with the appropriate line management. There is an Investment Management Risk and Control Committee where all areas outlined in this section of the response are reviewed with senior management, along with appropriate progress reports where necessary, on a regular basis.