Operational Risk

Presented By

Manmeet Thapar - 49 Vishrutha Maarar - 20

Arti Gada - 03Deepavali Vankalu - 04

Siddhesh Parab - 16Rammani Gupta - 10

CONTENTS

What is Operational Risk ( Definition)

Why Manage Operational Risk

Causes of Operational Risk

Types of Operational Risk

What is Operational Risk

• A form of risk that summarizes the risks a company or firm undertaken when it attempts to operate within a given field or industry.

• Operational risk is the risk that is not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems.

Contd………………

• Operational risk can be summarized as human risk; it is the risk of business operations failing due to human error.

• Operational risk will change from industry to industry, and is an important consideration to make when looking at potential investment decisions. Industries with lower human interaction are likely to have lower operational risk.

What is Operational Risk

• The Basel Committee defines operational risk as:

‘’The risk of loss resulting from inadequate or failed internal

processes, people and systems or from external events.’’

Credit risk or market risk is not a part of operational risk. 

Why Manage Operational Risk

• Operational risk can kill financial institution.

• Credit and market risk are now well known and understood and therefore more likely to merely wound.

• Operational risk is pervasive complex & dynamic unlike market and credit risk which tend to be isolated in the specific areas of the business.

• Operational risk pervades all business entities, hiding in wings , waiting to surface.

Advantages

Decrease in losses arising from operations

Early sensing of illegitimate functions

Decreased vulnerability to risks in the future

Reduced auditing/compliance expenses

Causes of Operational Risk

Internal Processes

People

Systems

External Events

Causes

CAUSES OF OPERATIONAL RISK

CAUSE DEFINATION EXAMPLES

Losses from failed transactions, client accounts, settlements and every day businessprocesses.

Data entry errorUnapproved accessVendor disputesNegligent loss/damage to clients /assets.

Losses caused by an employee or involving,employees (intentional or unintentional).

Losses caused through the relationship , that a firm has with its clients,shareholders, third parties, or regulators.

Unauthorized tradingInternal fraudWrongful terminationHarassmentSales discrimination

People

Internal Processes

Contd……..

Causes of Operational Risk

CAUSE DEFINATION EXAMPLES

Systems Losses arising from disruption of business orsystem failure due to unavailability ofinfrastructure or IT.

Hardware or software breakdownTelecommunications failuresProgramming errorComputer virusUtility outage/disruptions

ExternalEvents

Losses from the actions of 3rd partiesincluding external fraud, or damage toproperty or assets, or from change inregulations that would alter the firm’s abilityto continue doing business.

Peter Burchett and Wendy Dowd

Natural disasters (hurricane, flood,etcTerrorismExtortionCredit card fraudComputer crime

Types Of Operational Risk

• Internal Fraud• External Fraud• Employment Practices and Workplace

Safety• Clients, Products and Business Practices• Damage to Physical Assets• Business Disruption and System Failures• Execution, Delivery and Process

Management• Case Study – SBI- IT Related

Types Of Operational Risk

• Internal Fraud

Unauthorised activity , theft of fraud that involves atleast one internal party.

Eg: intentional ,misreporting of positions

Unauthorised undertaking of transactions

Insider tradingTheft RobberyForgery

contd…..

External Fraud

• External fraud refers to theft or fraud carried out by a third party outside the organisation.

Eg• Computer hacking damage and • theft of information

Contd……

Employment Practices and Workplace Safety

• This category refers to events relating to employee relations , safe working environment and discrimination.

E.g.: • Employee compensation claims • Wrongful termination.• Violation of health and safety rules • Discrimination claims • Harassment

Contd……

Clients, Products and Business Practices

• Operational losses in this category arise from a failure to meet an obligation to a client or from the nature or design of a product.

• eg • misuse of confidential client information• Money laundering• Product defects• Exceeding client exposure limits

Contd……….

Damage to Physical

Assets

• This category accounts for losses as a result of disaster and other events.

• Eg:• Natural disaster• Terrorism • Vandelism

Contd…….

Business Disruption and System Failures

• Hardware and software failures

• telecommunication problem• Utility outages and disruption

Contd…

Execution, Delivery and Process Management

• This category covers risk events related to transaction processing or process management , trade counter parties and vendors.

• Eg:• Miscommunication• Data entry errors• Accounting errors • Unapproved accesses given to client

account• Vendor disputes• Outsourcing

Case Studies 1SBI – IT Related

• SBI, UK’s Treasury operations use the Reuters 3000 dealing system.

• Dealers negotiate and confirm various deals .• Deals were posted manually into the banking

application.• Risk of error prone entries, missed out deals, lack of

suitable and timely checks & verification and inability to ascertain accurately counter party dealing limits.

• Requirement : ‘Straight through Processing’ from Reuters dealing server to the Misys-Equation platform to minimise operational risk.

Solution

• Technologies such as Microsoft Windows 2000 server,

Access database, IBM MQ series, Misys Meridian middleware and IBM

AS/400.

The process can be categorized as follows:

• Electronic capture of deals via Reuter Ticket Output Feed (TOF).

• Deal data processing with data validation and writing to database.

• Deal data mapping, formatting and posting to Misys Equation using

Meridian Middleware/IBM MQ Series.

• Secure and user-friendly interface to monitor flow of deal data, correct

any exceptions and review status of posting into Misys Equation.

• Intelligent use of Reuters Current Interest Feed (CIF) to retrieve counter-

party dealing limits and actual exposures from the Equation banking

system and displaying the same back to the dealers.