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Managing Operating Risk in a Wired World FIA Futures Services Division Susan Shaughnessy - Morgan Stanley March 15, 2007 Boca Raton, FL Agenda Panel Introductions What is Operational Risk? Operational Risk Factors Open Discussion Summary Panel Members Tom Dugan – Citigroup Ed Lynch – Goldman Sachs Ray Tubridy – Merrill Lynch George Haase – NYBOT Kim Taylor – CME What is Operational Risk? “ According to §644 of International Convergence of Capital Measurement and Capital Standards, known as Basel II, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Basel II definition includes legal risk, but excludes strategic risk: i.e. the risk of a loss arising from a poor strategic business decision. Examples of operational risk include: • Technology failure • Business premises becoming unavailable • Inadequate document retention or record-keeping • Poor management, lack of supervision, accountability and control • Errors in financial models and reports • Attempts to conceal losses or make personal gains (rogue trading) • Third party fraud In short, risk is associated with the non-availability of an environment to function." Supervisory Guidance on Operational Risk Advanced Measurement Approaches for Reg Capital - July 2, 2003 Operational Risk Factors Contract Volume By Exchange (Top Traded Products)* 1,000 Contract Volume (In Millions) 900 RISK LEVEL 800 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors 1,000 Contract Volume (In Millions) 900 800 700 Complex Products/Markets Contract Volume By Exchange (Top Traded Products)* RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume (In Millions) 900 800 Client Demand 1,000 Complex Products/Markets Contract Volume By Exchange (Top Traded Products)* RISK LEVEL 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume By Exchange (Top Traded Products)* 800 700 Client Demand Contract Volume (In Millions) 900 Complex Products/Markets 1,000 RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume (In Millions) 900 800 700 Client Demand 1,000 Complex Products/Markets Contract Volume By Exchange (Top Traded Products)* RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume (In Millions) 900 800 700 Client Demand 1,000 Complex Products/Markets Contract Volume By Exchange (Top Traded Products)* RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume (In Millions) 900 800 700 Client Demand 1,000 Complex Products/Markets Contract Volume By Exchange (Top Traded Products)* RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume By Exchange (Top Traded Products)* 800 700 Client Demand Contract Volume (In Millions) 900 Complex Products/Markets 1,000 RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Operational Risk Factors Contract Volume By Exchange (Top Traded Products)* 700 Loss of Expertise 800 Client Demand Contract Volume (In Millions) 900 Complex Products/Markets 1,000 RISK LEVEL 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Timeframe CME *Futures Industry Association Website EUREX MEXDER CBOT EURONEXT BM&F Open Discussion Summary With increased complexity, demand and regulatory scrutiny comes increased operating risk. Management of these risk will be a key underpinning of success. Risk Management = Empowered Business Decisions + Achieves Compliance = Competitive Advantage Paradigm Shift: Focus on risk management need to be commensurate with “running the line” Identify, Measure, Report and Manage Risk Continue to instill “Risk Aware” mindset at all levels of the organization and within the industry