Głowacki Law Firm

Operational risk
European Union Electricity Market Glossary


Operational risk is the failure to detect, identify, reconcile and promptly correct deficiencies in operating and information systems and processes that could result in the reduction, deterioration or breakdowns of services.


Such failures may lead to delays, losses, and liquidity problems. In addition operational deficiencies may reduce the effectiveness of measures that market participants may take to manage risk (IOSCO Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives FR01/2015 of 28 January 2015 p. 2).


"While firms might (consciously) take on credit and market risks in order to make a return, operational risk is an unavoidable consequence of any business activity, including any investment service or activity, under the MiFID. As the size and/or complexity of a firm, or the products or services it handles, increases, often so too does its operational risk profile, reflecting the higher potential for failure or inadequacy within the organisation (e.g. within the complex systems needed to monitor business activity appropriately) or bad behaviour (e.g. rogue trading, poor treatment of clients, systematic non-compliance).


Operational risk may also be a hidden risk, the impact of which might hit the firm unaware. Examples include rogue trading, mis-marking of positions, theft, a corporate action not exercised on behalf of a client, and a new product being booked into inappropriate systems (or not at all), meaning its risk profile cannot be monitored. Operational risk can, therefore, give rise to both direct risk to the firm and risk to its counterparties and customers" (Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20, p. 39).


The said EBA Report enumerates (p. 40, 41) a wide range of the most prevalent and material operational type risks that investment firms perceive themselves to face. These may be summarised as:

- staff, investment mandate and oversight, distribution and regulatory type risks;
- compliance risk, the risk of failing to meet regulatory or statutory obligations;
- failure to comply with regulatory requirements;
- oversight of overseas operations;
- availability and retention of staff;
- internal or external fraud;
- data accuracy;
- trade/dealing errors;
- oversight of third party providers/error in outsourcing providers/failure of outsourcing provider;
- new/amended fund details incorrectly implemented;
- business and systems disruption, cyber security;
- inappropriate accounting practices and/or inadequate tax practices;
- failure to carry out internal administration procedures properly or to a client's instructions;
- monitoring of mandates;
- outsourced relationships, including internal audit;
- unauthorised trading;
- improper employment practices;
- incorrect financial promotions;
- product and performance or fund valuation errors, physical damage, and loss of premises;
- financial crime and fraud, systems outage;
- operational processing errors; and
- client litigation.


Last Updated on Tuesday, 17 May 2016 22:29


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