Operational Risk White Paper
When implementing an Operational Risk Management (ORM) program, complexity, firm size and resources may vary, but the underlying concept remains the same: for a firm to succeed in today’s environment, priority should be given to operational practices that not only reduce risk, vulnerabilities and loss, but also connect processes, systems and people.
SIFMA’s Asset Managers Forum (AMF) Operational Risk Committee and Broadridge jointly address this topic in a white paper titled “Operational Risk: Tailoring the right model for asset management firms”. Through this white paper, we share insights to help you customize the right program for your firm, and explore efficient and effective ways smaller and mid-sized asset management firms can develop the most critical aspects of an operational risk framework.
Excerpt
Introduction
The past decade has flooded asset managers with challenges and complications—from escalating cyber-attacks, service provider and exchange outages, and devastating natural disasters to insider trading allegations against certain hedge fund companies, unprecedented regulatory changes with complex operational impacts, information security threats and controls required to protect that data, and the need for more complex investment solutions to satisfy client needs. All of which are challenging to not only understand but manage effectively.
Asset managers continue to look for solutions that enables them to excel in the face of unexpected challenges. Many asset managers find that Operational Risk Management (ORM) could be the path to manage challenges and complications.
Operational risk is defined as the ‘risk of loss resulting from inadequate or failed processes, people and systems or from external events (BASEL II)’. Effective ORM should be considered a critical component of any financial firm’s Enterprise Risk Management (ERM) program, as it mitigates a variety of risks across multiple disciplines that may materially impact the achievement of the firm’s corporate and strategic objectives. Regardless of the pressure, firms should be able to proactively meet, contain and control these challenges via an ERM framework that includes Operational risk as a critical component.
The recent financial crisis has elevated the importance of how financial firms manage credit and market risks. And while there is a heightened awareness of risk management in general, how to implement the best operational risk program can be elusive. A 2013 risk management survey conducted by Deloitte & Touche to gauge the state of risk management noted that while most financial firms rated themselves as effective in managing liquidity risk (85%), credit risk (83%) and regulatory and compliance risk (74%), only 45% of the 86 respondents gave themselves a high rating for ORM.1 Approximately one-half of the 86 financial firms surveyed were stand-alone investment management firms or investment managers of larger integrated financial institutions.
While banks and insurance companies have fairly prescriptive guidance from regulators for an effective ORM program, the requirements and expectations for stand-alone asset managers may be less prescriptive. Some additional challenges faced in particular by smaller asset management firms may include:
• Small number of support staff relative to assets
under management where there are limited
internal resources to cover operational risks;
• Potential for inadequately established
independent lines of defense due to commonly
flat organizational structure of the industry