Assignment:
Traditional Risk Workshops: Operational risk
Few description of Operational Risk:
1. OR is the risk of loss from inadequate or failed processes, people, and systems, or from external events. This definition includes legal risk, but excludes strategic and reputational risk. (Basel/OCC/Solvency II)
2. Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies. Employee errors. Systems failures. Fraud or other criminal activity. Any event that disrupts business processes.
3. Operational risk summarizes the risks a company undertakes when it attempts to operate within a given field or industry. Operational risk is the risk 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.
4. Operational risk (OR) is the risk of impaired or failed business operations due to human error (including legal and compliance failures), flawed processes, failed systems, or from an external event that disrupts operations, e.g., blizzard or hurricane.
Operational Risk - Key concepts:
Risk culture: Risk culture is a firm's norms and behaviors related to risk awareness, risk-taking, and risk management
Risk Governance: Risk governance includes identifying the roles and responsibilities of different parts of the firm for managing and addressing risk
Risk appetite: The overall amount and type of risk that an organization is willing to seek or accept in pursuit of value. A broad set of statements that lays out the amount and type of risk the firm is willing to pursue or accept.
Risk tolerance: The amount of risk an organization is willing to take (or accept) in key risk areas. It is more specific and granular with a likely quantifiable limit. A subset of risk appetite statement.
Risk Framework and Policies:
Risk Management Framework is a set of components [tools] that support and sustain risk management throughout an organization. There are two types of components: foundations and organizational arrangements. Foundations include your risk management policy, objectives, mandate, and commitment. And organizational arrangements include the plans, relationships, accountabilities, resources, processes, and activities you use to manage your organization's risk.
Risk Management Policy is a statement that defines a general commitment, direction, or intention. A risk management policy statement expresses an organization's commitment to risk management and clarifies its general direction or intention.
Instructions:
1. Understanding the Environment: Read the related articles and watch the video links on Knight Capital. Feel free to perform other research beyond these links, these are merely a starting point.
2. Evaluating What Went Wrong at Knight Capital: Using the concepts of Operational risk management concepts
Please provide short answers (a few sentences each) to the following questions on the failure at Knight Capital
I. Summarize briefly what went wrong at Knight Capital on August 1, 2012
II. Categorize the causes of the events into policy, governance, process, and people failures
III. What is the OR loss event in this case? From the past learnings in course what tools can be used to identify and prioitize a firm's
OR.
3. Applying the Operational Risk concepts to Knight Capital
a. Define a Risk Governance structure
b. Define a Risk appetite statement(s)
c. Outline 3 OR risk tolerance statements specific to the problem that you have identified for the company
d. Identify 3 OR loss events based on the problem that you have identified for the company
e. Outline a risk framework/policy document to mitigate the OR loss events (Use the Three LOD model to assign roles and responsibilities)