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BlackRock’sGuideto Fixed-IncomeRisk Management

BlackRock’sGuideto Fixed-IncomeRisk Management

Copyright©2024byBlackRock,Inc.Allrightsreserved.

PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.

PublishedsimultaneouslyinCanada.

Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyany means,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunderSection 107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthePublisher, orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)750-4470,oronthewebat www.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepartment, JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748-6008,oronlineat http://www.wiley.com/go/permission.

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LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsinpreparing thisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessofthecontents ofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticular purpose.Nowarrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials.Theadvice andstrategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessional whereappropriate.Further,readersshouldbeawarethatwebsiteslistedinthisworkmayhavechangedor disappearedbetweenwhenthisworkwaswrittenandwhenitisread.Neitherthepublishernorauthorsshallbe liableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages.

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LibraryofCongressCataloging-in-PublicationData:

Names:Golub,BennettW.,author.|JohnWiley&Sons,publisher.

Title:BlackRock’sguidetofixed-incomeriskmanagement/BennettW. Golub.

Description:Hoboken,NewJersey:Wiley,[2023]|Includesindex.

Identifiers:LCCN2023007920(print)|LCCN2023007921(ebook)|ISBN 9781119884873(hardback)|ISBN9781119884897(adobepdf)|ISBN 9781119884880(epub)

Subjects:LCSH:Financialriskmanagement.|Fixed-incomesecurities—Risk management.|Investments—Riskmanagement.

Classification:LCCHD61.G6442023(print)|LCCHD61(ebook)|DDC 658.15/5—dc23/eng/20230505

LCrecordavailableathttps://lccn.loc.gov/2023007920

LCebookrecordavailableathttps://lccn.loc.gov/2023007921

CoverDesign:WileyandBlackRock CoverImage:©LiyaoXie/GettyImages

“And,ofcourse,stabilityisn’tnearlysospectacularasinstability.”

2.7.1PrepaymentDuration

2.7.2Mortgage/TreasuryBasisDuration

3.1ProbabilityDistributionsofSystematicRiskFactors59

3.2.3TheFirstPrincipalComponentandtheTermStructureof

3.2.4Example:HistoricalSteepenersandFlattenersoftheUS

4.3.1WeightingofHistoricalData

4.3.1.1ExponentialDecayWeighting

4.3.1.2AlternativeWeightingSchemesandStressScenarios

4.3.1.3EnhancingVolatilityResponsivenessDynamically

4.3.2Asynchronicity

4.3.2.1OverlappingCovarianceMatrix

4.3.3FactorModelStructure:Generalizations

4.3.3.1OptimizationoftheError-BiasTrade-Off

4.3.3.2MisspecificationandOmittedCovariation

4.3.4CovarianceMatrixEstimation:Summaryand Recommendations

4.4ExAnteRiskandVaRMethodologies93

4.4.1VaREstimationApproaches

4.4.2EnhancedHVaR 98

4.4.2.1EHVaRSystematicRiskMethodology 99

4.4.2.2EHVaRIdiosyncraticRiskMethodology 101

4.4.3VaREstimation:Summary 102

4.5IntroductiontoRiskDecomposition103

4.6AlternativeApproachestoRiskDecomposition104

4.6.1AComparisonoftheDifferentApproaches 106

4.7RiskDecompositionUsingCTR108

4.7.1Security-LevelContributionsandAggregations 108

4.7.2Factor-LevelContributionsandAggregations 109

4.7.3DecomposingContributiontoRiskintoAtomicContributions 111

4.7.4DecomposingContributiontoRiskintoExposure,Volatility, andCorrelation 113

4.7.5DecomposingContributiontoRiskUsingANOVA 114

4.8RiskDecompositionThroughTime116

4.9RiskDecomposition:Summary119 AppendixA.EHVaR:IdiosyncraticRiskEstimation119 AppendixB.EHVaR:Aggregation122 Notes 123

CHAPTER5

Market-DrivenScenarios:AnApproachforPlausibleScenarioConstruction125 BennettW.Golub,DavidGreenberg,andRonaldRatcliffe

5.1Introduction125

5.2ImpliedStressTestingFramework127

5.2.1Market-DrivenScenarioFramework 127

5.2.2ScenarioLikelihood 128

5.2.3FromLikelihoodtoProbability 129

5.2.4DecomposingtheScenarioZ-Score 131

5.2.5SpecifyingaCovarianceMatrix 133

5.3DevelopingUsefulScenarios134

5.3.1ScenarioDefinition 134

5.4AMarket-DrivenScenarioExample:Brexit136

5.4.1DescribingDifferentBrexitScenarioOutcomes 136

5.4.2IdentifyingKeyPolicyShocksinSoftBrexitScenario 137

5.5Conclusion142

Appendix:DecompositionofScenarioZ-Score143 Notes 143

CHAPTER6

AFrameworktoQuantifyandPriceGeopoliticalRisks145 CatherineKress,CarlPatchen,RonaldRatcliffe,EricVanNostrand,andKeminYang 6.1Introduction145

6.2SettingtheScene146

6.2.1ShortandSharp 147

6.2.2ShadesofGray 148

6.3BlackRock’sFrameworkforAnalyzingGeopoliticalRisks149 6.4GlobalTradeDeepDive149

6.4.1CalibratingtheShocks

6.5WhatIsAlreadyPricedIn?153

6.5.1IsItPricedIn?

6.5.2AdjustedImpacts

6.5.3AssessingLikelihood

6.5.4Takeaways

6.6TakingAction156

6.6.1KeyDrivers

6.6.2BGRI-SpecificAssets

6.6.3ThePathForward

CHAPTER7

7.1Introduction163

7.2ABriefHistoryofLiquidityRiskManagement164 7.3AFundLiquidityRiskFramework166

7.4AssetLiquidity166

7.4.1ImportanceofDataModelingforLiquidityRiskManagement

7.4.2AssetLiquidity:Days-to-Liquidate

7.4.3AssetLiquidity:CorporateBondTransactionCosts(T-Costs)

7.5RedemptionRisk169

7.5.1ManagingRedemptionsandOutflowRisk

7.6LiquidityStressTesting170

7.7ExtraordinaryMeasures171

7.8Fixed-IncomeDataAvailabilityLimitations171

7.8.1ModelingAssetLiquidity

7.8.2ModelingRedemption-at-Risk

7.8.3ModelingLiquidityOptimization

CHAPTER8 UsingPortfolioOptimizationTechniquestoManageRisk183 AlexUlitsky,BennettW.Golub,LeoM.Tilman,andJackHattem

8.1RiskMeasurementVersusRiskManagement183

8.2TypicalFixed-IncomeHedges185

8.3ParametricHedgingTechniques187

8.4GeneralizedApproachtoHedging189

8.4.1HedgingasConstrainedPortfolioOptimization

8.4.2MathematicalFormulation

8.4.2.1ExposureHedging

8.4.2.2ManagingaPortfolioAgainstaBenchmark

8.4.2.3StressScenarioHedging

8.4.3ExamplesofOptimizedRiskManagementStrategies

8.4.3.1CreatinganESGTiltWhileManagingaFixed-Income PortfolioRelativetoaBenchmark

8.4.3.2HedgingStressScenarioExposure

8.5AdvancedPortfolioOptimizationandRiskManagementTechniques207

8.5.1RiskBudgeting/Parity

8.5.2GoingBeyondaSingleFund/SinglePeriodinPortfolioRisk Management

8.5.2.1Multi-FundPortfolioConstructionandRiskManagement

8.5.2.2Multi-PeriodPortfolioConstructionandRiskManagement

8.5.2.3RiskManagementUsingScenarioOptimization

8.5.3Example:RiskBudgetingforFactor-BasedInvesting

CHAPTER11 PerformanceAttribution243

ReadeRyanandCarolYu 11.1Introduction243

11.2BrinsonAttributionandBeyond244

11.2.1ComparingMarketValueBrinsonAttributiontoBeta-Adjusted Attribution 250 11.3Factor-BasedAttribution252

11.4EquityFundamentalFactor-BasedAttribution256

CHAPTER12 PerformanceAnalysis259

MarkPaltrowitz,MarkTemple-Jones,ViolaDunne,andChristopherCalingo 12.1Introduction259 12.2PerformanceGovernance260 12.3PerformanceMetrics260

12.3.1.1AlphaTargetRatio

12.3.1.2WeightedPeerPercentile

12.3.1.3StrengthsandWeaknessesoftheATRandWeightedPeer Percentile

12.3.1.4AlphaDollars

12.3.1.5StrengthsandWeaknessesofAlphaDollars

12.3.2IndexPerformanceMetrics

12.3.2.1DirectTrackingBasisPoints(BP)

12.3.2.2StrengthsandWeaknessesofDirectTrackingBP

CHAPTER13 EvolvingtheRiskManagementParadigm267

BennettW.Golub,MichaelHuang,andJoeBuehlmeyer 13.1Introduction267

13.2TraditionalBuy-SideRiskManagementFramework268

13.3EvolvingtheIRMP:InPursuitofInvestmentRiskManagementatScale268

13.4RiskGovernance270

13.5SupportingRiskGovernanceThroughTechnology270 13.6ImplementingaRiskGovernanceFrameworkThroughAladdin271

13.7Aladdin’sRiskRadarExample271

13.7.1Aladdin’sRiskRadarOverview 271

13.7.2RulesandPortfolioSubscriptions

13.7.3ExceptionsandTasks

13.7.4ExceptionClassification

13.7.5RiskExceptionReportingandAudit

13.7.6WhatIsNextforTechnology-EnabledInvestmentRisk Oversight?

13.8Conclusion276

SECTIONII Fixed-IncomeRiskManagement—ThenandNow277

CHAPTER14

TheModernizationoftheBondMarket279

DanielVeiner,StephenLaipply,CarolynWeinberg,SamaraCohen,Vasiliki Pachatouridi,andHuiSienKoay

14.1ChartingtheEvolutionofBondMarkets279

14.1.1TheCurrentStateofBondMarketLiquidity 279

14.1.2TheModernizationofBondMarketStructure 281

14.1.3ContinuedGrowthinElectronicBondTrading 283

14.2TheDevelopmentofanIndex-BasedEcosystem285

14.2.1Fixed-IncomeETFs:ContinuedStrongGrowthandAdoption 285

14.2.2PortfolioTradingandFixed-IncomeETFs 286

14.2.3ContinuedGrowthinBondIndexDerivativesMarkets 288

14.2.4Fixed-IncomeETFOptions 288

14.3ImplicationsforInvesting,PortfolioManagement,andRisk Management289

14.3.1UseCasesforFixed-IncomeETFsandOtherIndexExposures 289

14.4TheFutureStateofPortfolioConstruction290

14.4.1PortfolioEngineeringandConstruction 290 14.5Conclusion290 Notes 291

CHAPTER15

TheLIBORTransition293

JackHattem

15.1Introduction293

15.2ImplicationstoPortfolioandRiskManagement295 15.3ShiftfromLIBORtoSOFR295

15.4RiskManagementImpactandCoordination297 15.5ReflectionsonaBenchmarkReforms298 Notes 300

CHAPTER16

DerivativesReform:TheRiseofSwapExecutionFacilitiesandCentralCounterparties301 EileenKielyandJackHattem

16.1TheCallforChange:2008GlobalFinancialCrisis301

16.1.1SEFs

16.1.2CCPs 302

16.2TheValueofDerivativesinFixed-IncomePortfolios302 16.3TradingFixed-IncomeDerivatives:TheRiseofSEFs304 16.4ClearingFixed-IncomeDerivatives:TheRiseofCCPs305 16.5CCPRiskMitigationTechniques306

16.5.1CCPRiskMitigationTechniques:WhatCouldGoWrong? 308

16.6TheCallforChange:MarketParticipantsAskforStrongerCCPs308 16.7Conclusion311 Notes 311

CHAPTER17

BennettW.GolubandConanCrum

19.5COVID-19Lessons:WhatWorkedandWhatNeedstobeAddressed357

19.6RecommendationstoEnhancetheResilienceofCapitalMarkets363

19.6.2.4CentralClearingCounterparties(CCPs)

19.6.2.5Equities

FrequentlyUsedAbbreviations

ABSAsset-BackedSecurities

ADVAverageDailyVolume

ANOVAAnalysisofVariance

APAuthorizedParticipant

APGAladdinProductGroup

ARRCAlternativeReferenceRatesCommittee

ARRsAlternativeReferenceRates

ATMAt-the-MoneyorAutomatedTellerMachine

ATRAlphaTargetRatio

AUMAssetsUnderManagement

AVaRAnalyticalVaR

BGRIBlackRockGeopoliticalRiskIndicator

BLKBlackRock

BoEBankofEngland

BPBasisPoint

BSRMFBuySideRiskManagersForum

BWICBidsWantedinCompetition

CCDCouponCurveDuration

CCostCostofCarry

CCPCentralCounterparty

CDFCumulativeDistributionFunction

CDSCreditDefaultSwap

CDXCreditDefaultSwapIndex

CIOChiefInvestmentOfficer

CLOCollateralizedLoanObligation

CMClearingMember

CMBSCommercialMortgage-BackedSecurities

CMRACapitalMarketRiskAdvisors

CPCommercialPaper

CPRConditionalPrepaymentRate

CROChiefRiskOfficer

CSACollateralSupportAgreement

CTFCollectiveTrustFund

CTRContributiontoRisk

CVaRConditionalVaR

DxSDurationTimesSpread

EHVaREnhancedHVaR

EMEmergingMarkets

EMHEfficientMarketHypothesis

ERMExchangeRateMechanism

ESExpectedShortfall

ESGEnvironmental,Social,andGovernance

€STREuroShort-TermRate

ETDExchange-TradedDerivative

ETFExchange-TradedFund

ETPExchange-TradedProduct

EWMAExponentiallyWeightedMovingAverage

FCAFinancialConductAuthority

FCMFuturesCommissionMerchant

FINRAFinancialIndustryRegulatoryAuthority

FSBFinancialStabilityBoard

FSOCFinancialStabilityOversightCouncil

FXForeignExchange

GDPGrossDomesticProduct

GFCGlobalFinancialCrisis

GNMAIIMBSGinnieMaeMortgage-BackedSecurity

HFHedgeFund

HRaRHistoricalRedemption-at-Risk

HRORHorizonRateofReturn

HVaRHistoricalVaR

HYHighYield

IBORsInterbankOfferedRates

ICTRIncrementalContributiontoRisk

IGInvestmentGrade

IMInitialMargin

IMAInvestmentManagementAgreement

IOSCOInternationalOrganizationofSecuritiesCommissions

IRInformationRatio

IRMPInvestmentRiskManagementParadigm

ISDAInternationalSwapsandDerivativesAssociation

ITMIn-the-Money

ITRMIdiosyncraticTailRiskMultiplier

KRBCKeyRateBucketConvexities

KRDKeyRateDuration

LCRLiquidityCoverageRatio

LDILiability-DrivenInvestment

LIBORLondonInterbankOfferedRate

LTVLoantoValue

LVNAVLowVolatilityNetAssetValue

MBSMortgage-BackedSecurities

MCTRMarginalContributiontoRisk

MDMahalanobisDistance

MDSMarket-DrivenScenario

MiFIDIIMarketsinFinancialInstrumentsDirective

MMFMoneyMarketFund

MPOMulti-PeriodOptimization

MRACMarketRiskAdvisoryCommittee

MSQEMean-SquaredError

MTBMortgage/TreasuryBasis

MWCBMarketWideCircuitBreaker

NAVNetAssetValue

NBFINon-BankFinancialIntermediation

OACOption-AdjustedConvexity

OADOption-AdjustedDuration

OASOption-AdjustedSpread

OAVOption-AdjustedValue

OCCOfficeoftheComptrolleroftheCurrency

OISOvernightIndexSwaps

OLSOrdinaryLeastSquares

OTCOver-the-Counter

OTMOut-of-the-Money

OTROn-the-Run

OTSOfficeofThriftSupervision

OWICOffersWantedinCompetition

P&LProfitandLoss

PCAPrincipalComponentsAnalysis

PEPPPandemicEmergencyPurchaseProgramme

PFMIPrinciplesforFinancialMarketInfrastructure

PQDPublicQuantitativeDisclosure

PROCPortfolioRiskOversightCommittee

PRVPurchaseRedemptionValue

PTFProprietaryTradingFirm

REITsRealEstateInvestmentTrusts

RFQRequestforQuote

RFRRisk-FreeRates

RPTRiskandPerformanceTargets

RQARisk&QuantitativeAnalysis

SARStandaloneRisk

SARONSwissAverageRateOvernight

SECSecuritiesandExchangeCommission

SEFSwapExecutionFacility

SOCPSecondOrderConicProgramming

SOFRSecuredOvernightFinancingRate

SONIASterlingOvernightIndexAverage

SPACsSpecialPurposeAcquisitionCompanies

STRMSystematicTailRiskMultiplier

T-costTransactionCost

TONATokyoOvernightAverageRate

TRACETradeReportingandComplianceEngine

TRSTotalReturnSwaps

TSOVTermStructureofVolatility

TSYTreasury

UCITSUndertakingsforCollectiveInvestmentinTransferableSecurities

UMBSUniformMortgage-BackedSecurities

USTUSTreasury

VaRValueatRisk

VMVariationMargin

WFHWorkfromHome

WoWWeek-over-Week

ZV0ZeroVolatilitySpread

Backinthedistantdaysofthemid-1980sIbeganmycareerfocusedonequitymarkets.

Overthenexttwodecades,theabundanceofpriceandvolumedata,alongwiththerelativelylimitedsetofvariablesrequiredtodescribeequityrisk,ledtothedevelopmentof fundamentalandstatisticalequityriskmodelsthatarenowubiquitousacrosstheassetmanagementindustry.

Induecourseitbecameobvioustomethatinordertounderstandinvestmentriskinall itsforms,someknowledgeoffixed-incomemarketsandproductswasalsonecessary.Many yearsbeforemyassociationwithBlackRock,Icameacrossabook, RiskManagement: ApproachesforFixedIncomeMarkets (2000)byBennettW.GolubandLeoM.Tilman. Irememberreadingitwithsomefascination.Thestatisticalconstructswere,atleastin part,similartothoseusedinequitymarkets.However,themarketsthemselveswerevery different.Nonetheless,therigorofthediscussionsandthepracticalityofthecontentswere incrediblyusefultomebackthen.

SomeyearslaterBenGolubandIbecamecolleagueswhenBlackRockacquired MerrillLynchInvestmentManagement,whereIwasthentheheadofitsRisk&QuantitativeAnalysisgroupinLondon.Thisbroughtmeforthefirsttimeintocontactwith BlackRock’sfixed-incomeanalyticsandriskmanagementteams.Myequitiesbackground combinedwithBlackRock’sfixed-incomeexpertisemadeforagoodmatch,andIwas appointedtheco-headwithBenGolubofamergedRisk&QuantitativeAnalysisgroup.

Overthesubsequent16years,muchhastakenplaceinbothmarketsandriskmanagement.Thecontrastsbetweenequitiesandfixed-incomeinvestingwere,inmanyrespects, palpable.Someofthecharacteristicsoffixed-incomesecuritiesbecameclearertome,suchas thelimitedtradingandevenmorelimitedpricedata,thelagsintheavailabilityofthelimited amountofpricingdata,theastoundingnumberofindividualsecurities,andthenonstandard termsandconditionsofsecurities.Real-worldriskmanagementmeantmakingnecessary compromisesfromtheequityideal.

Currently,changesandreformsaremovingfixed-incomemarketssomewhatcloserto themoreidealizedequitymarkets,makingcertaintypesofanalysesthatwereroutineinthe equitymarketspartiallyavailableforfixed-incomesecurities.

Thelast16yearshavealsocontainedsomemajormarketevents,includingtheGlobal FinancialCrisisandtheCoronaviruspandemic,thatchallengedthenotionthatevenexchange marketsoperateefficientlyallthetime.Someofthelaterchaptersinthisbookthatfocuson financialcrisescontainlessonsthatwelearnedthataregenuinelyworthremembering.

ThisbookintroducesthenotionofanInvestmentRiskManagementParadigm(IRMP). Thisisparticularlyusefulasareminderoftheneedtoenforceconsistentlevelsofrigoracross allofthefirm’sinvestmentprocesses.Havingaformalnotionofthisstandardizationhasbeen extremelyuseful,especiallywheninvestmentprocesseschangeoractivitiesareadded.

Historywillnotbekindtosomenotionsofriskmanagementthatturnouttobeformalizedmanifestationsofself-delusion.Otheranalyticsorframeworkswillbetterlastthe

testoftime.ButwhileIamcertainthatsomeofthenotionsdescribedinthisbookwill eventuallyneedtochange,justasmanywereeventuallyeditedoutofthefirstedition,many willstandthetestoftime.Thisbookpresentstechniquesandpracticesthatareactuallyused andareactuallyuseful.Irecommendittoinvestorsandriskmanagerswhowishtogetan insightintohowinvestmentriskmanagementiscontemporaneouslypracticedatamajor globalmulti-investmentprocessassetmanager.

BlackRock,Inc.

Summer2023

Preface

Changingmarketdynamics,technologicaladvances,andgeopoliticalstresseshavetransformedinvestmentriskmanagement.Asnewandbespokeproductshaveemerged,new risksandadditionalcomplexitieshavedrivenadvancesinriskmanagementprocessesand analytics.Consider,forexample,alltheforcedandrapidinnovationsthatarosefromthe Coronaviruspandemic.Giventheabundanceofchange,riskmanagershavehadtoadapt theirprocessesandtoolstoaddressmarketturbulence,structuralbondmarketchanges,productcomplexity,andincreasedregulatoryoversight.Additionally,riskmanagershavelearned totakeadvantageofsomeofthesetechnologicaladvances,resultinginbetteranalyticsand theabilitytoanalyzebiggerandbroaderdatasets.Anintellectuallycuriousriskmanagement culture,coupledwithrigorousriskmanagementprocessesandtechnologicalcompetence, facilitatesriskmanagers’abilitytorapidlyandeffectivelyadapttonewcircumstances.

Recognizingthedynamicnatureofinvestmentriskmanagementinformsusthatitis almostcertainthatsomeoftheideasandmethodologiespresentedinthisbookwillinevitably becomeobsoletethemselves.Similarly,thereinevitablyareimportantomissions,eitherintentionallyduetothelimitationsoftimeorareoutsidethewisdomandfirsthandknowledgeof theauthors.

Thisbookisaheavilyeditedandexpandededitionof RiskManagement:Approaches forFixedIncomeMarkets (2000)byBennettW.GolubandLeoM.Tilman(thefirstedition). Inthe23yearsfollowingtheoriginalEnglishlanguagepublication,muchhashappenedto reshapetheinvestmentriskmanagementlandscape.Forexample,theheightenedattention bymarketsandinvestorstoESG(environmental,social,andgovernance)characteristicswas neverenvisionedwhentheoriginalbookwaspublished.ThedefinitivebookonESGriskmanagementhasprobablynotbeenwrittenyet;thisbookintentionallyomitsmuchofthattopic, whiletheprofessionawaitsaconclusivestate-of-the-practicevolume.Also,whilecurrentlya hottopicandonethatcertainlyhasdemonstratedtheabilitytogeneratemultipleriskmanagementfailures,thisbookisintentionallysilentontheriskmanagementofcryptocurrencies; weawaitthosemarkets’riskmanagementprocessesmaturing.

Thetechnologicalintensityofinvestmentriskmanagementhasincreaseddramatically. Twenty-threeyearsago,technologywasnotnecessarilyattheforefrontofmostinvestment managementfirms.Now,technologyisoneofthecriticalsuccessfactors—allowingfirmsto continuetoevolvetomeetclients’needs,respondtomarketchangesandregulatoryrequirements,andcreateoperationalefficienciesandscale.Withimprovementsintechnology,firms arenowabletoperformtasksthatwerepreviouslytechnologicallyimpossibleorwouldtake toomuchtimeortoomuchexpensivehardwaretobeuseful.Wheneditingsectionsofthe originalbookforinclusioninthisnewedition,referencestoanalytictechniquesthatinvolved compromisingaccuracyforcomputationalefficiencywereremovedfromthemanuscript; thereismuchlessneedtocompromiseprecisionforthesakeofeconomizingcomputationalresources.TheimplicationsofMoore’sLaw,broadlyspeaking,continuetomakemore andmorecomputationalresourceseconomical.Cloud-basedapplications,forexample,can summonmassiveamountsofcomputationalpowerondemand.Organizationscanstore,

analyze,manipulate,andsynthesizewhatwouldhavebeenunimaginableamountsofdata morecheaplyandquicklythaneverbefore.Thesophisticatedandcreativeuseoftechnology,hasbecomeanessentialpartofeffectiveinvestmentriskmanagement.Havingtheright technologytomanageriskisnolongeraluxury;itisanecessity.

BlackRock’scommitmenttoinnovationandtheuseoftechnologyhasbeenoneofthe keydriversofitsongoingrobustgrowth.DevelopingandevolvingAladdinandleveraging technologyhasbeenpartofBlackRock’sfoundingvisionandhasenabledthefirmtobecome amassivescaleoperator,highlyefficient,integrated,anddynamic.Asthefirmgrowsand technologyevolves,Aladdincontinuestobeabest-in-classsolution,usedbyBlackRockto operateefficientlyatscale.ThesameAladdintechnologyusedbyBlackRockisalsoavailable andheavilyusedbymanymajorglobalfinancialinstitutions.

ThemotivationforthisbookoriginatedduetoaninquiryfromaBlackRockclientabout whenthefirsteditionwouldberevised.Initially,thisseemedtobearelativelystraightforward task,andtheprojectwasinitiatedin2017.Atfirst,theplanwastoupdatedata,tables, andexhibitsandremovetopicsthatwerenolongerrelevant.However,afterthisediting process,itbecameapparentthatsimplyupdatingthedataandremovingobsoletesections wouldbesorelyinadequategivenhowmuchmarkets,products,andriskmanagementhave evolved.Instead,itbecameclearthatiftheoriginalbookweretobeproperlyupdated,a substantialexpansionofthetopicscoveredwouldberequired.That,ofcourse,madecreating thesecondeditionamateriallygreatertask.Givenmythencurrentroleaschiefriskofficerof BlackRock,thistaskwouldhavebeenbeyondmyabilitytocomplete.In2018,Iconcluded thatifweexpandedthescopeofthebook,theonlyfeasiblepathforwardwastoaskmyfellow BlackRockcolleaguestocontributetheirexpertiseandenthusiasmandauthororcoauthor theneededchapters.Unliketheoriginalbook,whichwaswrittenasaunifiedwholeina singlevoice,theneweditionwouldincludechaptersonawiderangeoftopicswrittenby manyauthors.

BringingtogetherBlackRock’sleadersinriskmanagement,portfoliomanagement,trading,financialmodeling,psychology,andanalytics,thissuccessorbooktothefirstedition, nowtitled BlackRock’sGuidetoFixed-IncomeRiskManagement,representsacombination ofrevisedandupdatedchaptersfromtheoriginalbookandacollectionofnewstandalone chapterscoveringarangeofinvestmentriskmanagementtopics.Eachchapterhasbeen authoredbyBlackRock’scurrentorformerseniorsubjectmatterexperts.Whilethebook focusesprimarilyonfixed-incomepractices,analytics,andmodels,manyoftheconcepts presentedareequallymeaningfulinamulti-assetcontext.Thisbookcanfirstbeconsidereda practitioner’sguidetofixed-incomeriskmanagement,leveragingBlackRock’soverallinvestmentriskmanagementframeworkforoperatingaviableriskmanagementprogramatscale, heterogeneity,andcomplexity.

ORGANIZATIONOFTHEBOOK1

Thisbookisorganizedintothreesectionsandcoversthefollowingthemes:

(I) AnApproachtoFixed-IncomeInvestmentRiskManagement (II) Fixed-IncomeRiskManagement—ThenandNow (III) LessonsfromtheCreditCrisisandCoronavirusPandemic

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