• The level of management needed
• The scope to absorb additional workload and/or delays to the
processing.
From the above, it can be seen that some kind of operational risk
measurement is possible; and that it should be continuous. We can
choose not to measure, even crudely, the risk on the basis that it
may never create a major problem but then you could leave your
house unlocked all day and never get burgled!
Summary
Operational risk is highly relevant to derivatives, and derivatives
clearing and settlement. Sources of risk must be identified and in
conjunction with the firm’s overall risk management structure they
must be managed. Operational risk sources can be diverse as the
following list shows:
• Lack of product knowledge
• Poor system reliability
• Inadequate levels of staffing
• Inefficient counterparties
• Diverse and unpredictable business levels
• Overseas clients
• Lack of critical skill sets including product knowledge
• Fraud and criminal activity
• Poor communication and poor internal relationships.
Each of these sources is very different, and so are the types of risk
and the frequency with which they might occur.
Lack of product knowledge could be put down to:
• Turnover of staff
• Loss of experienced personnel
• New products being traded
• Non availability of information
• Lack of training.
It may be a major problem, or it may only be relevant if and when a
particular type of product is traded. Bear in mind also that other risks
may become associated with it such as regulatory risk and repu-
tational risk.
For example, a clearing member will usually have to demonstrate to
the clearing house the competency of its staff, systems and processes.
164 Clearing and settlement of derivatives