|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;
|Last Updated on Tuesday, 17 May 2016 22:29|