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Risk Management

The Outline of Operational Risk

Operations Risk & the Derivatives Value Chain

Operational Risk speaks to any risk along the value chain. They are the errors which typically combine human error and misunderstanding.

Areas of Operational Risk

The areas known as “operational” are any risk which can be ascribed to events which placed the institution at risk of fine(s) or censure.

Errors Found During Regulatory Examinations

Banks, Broker-Dealers, Insurance Companies, and other financial services related entities are examined by their Regulatory Oversight Organizations. Regulatory Examinations are vital to an organization. Personnel is given strict orders not to answer any questions and is given the name and contact information to whom they should refer the questioner. Eye contact was limited and the examiners were given their own space from which to work. The examiners were not allowed in the trading rooms or on floors where senior management would greet and meet with clients.

Errors resulting from Lack of Follow-Up

If certain notices to “cure” are given by regulators, the letter includes a period during which they were required to cure the issue. For example, if credit work had been delayed and was listed by regulators to review the entity and provide the updated report to the examining regulator. The cure list could include anything from credit reports to the number of time stamps on an execution ticket.

Errors Resulting From Human Error

Other types of risk are pure human error. For example:

  • Improper Affirmation of a contract
  • Non-Receipt of a signed confirmation
  • Error in static data
  • Error in cash accrual
  • Error in Documentation

Ways to Correct Operational Risk

Integrated Training, as taught by MHDS is an online or blended program given to the entire value chain. We pay particular attention to those job functions that worked directly before or after a specific function. For example, each middle office job function role play so that affirmation understands the process of submitting the trade (pre-affirmation) and ensuring receipt of a signed confirmation (post-confirmation). This allows all three functions to introduce redundancies and work like a well-oiled team.

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