Operational risk refers to the risk of losses resulting from inadequate or failed internal processes, systems, or people, or from external events. It is the risk remaining after accounting for market, credit, and other risks. Some key causes of operational risk include internal and external fraud, workplace issues, problems with clients, damage to physical assets, and business disruptions. Industries with lower human interaction tend to have lower operational risk. A case study describes how State Bank of India implemented straight-through processing to reduce operational risk from manual errors in transferring dealing data between its treasury and banking systems.

1. Presented By ManmeetThapar - 49 VishruthaMaarar - 20 ArtiGada - 03 DeepavaliVankalu - 04 SiddheshParab - 16 RammaniGupta - 10

2. Contents

3. What is Operational Risk A form of risk that summarizes the risks a company or firm undertaken when it attempts to operate within a given field or industry. Operational risk is the risk that is 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. Contd……………… Operational risk can be summarized as human risk; it is the risk of business operations failing due to human error. Operational risk will change from industry to industry, and is an important consideration to make when looking at potential investment decisions. Industries with lower human interaction are likely to have lower operational risk.

5. What is Operational Risk The Basel Committee defines operational risk as: ‘’The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.’’ Credit risk or market risk is not a part of operational risk.

6. Why Manage Operational Risk Operational risk can kill financial institution. Credit and market risk are now well known and understood and therefore more likely to merely wound. Operational risk is pervasive complex & dynamic unlike market and credit risk which tend to be isolated in the specific areas of the business. Operational risk pervades all business entities, hiding in wings , waiting to surface.

7. Advantages

8. Causes of Operational Risk Causes

9. Causes of Operational Risk Internal Processes People Contd……..

10. Causes of Operational Risk

11. Types Of Operational Risk Internal Fraud External Fraud Employment Practices and Workplace Safety Clients, Products and Business Practices Damage to Physical Assets Business Disruption and System Failures Execution, Delivery and Process Management Case Study – SBI- IT Related

12. Types Of Operational Risk Internal Fraud Unauthorised activity , theft of fraud that involves atleast one internal party. Eg: intentional ,misreporting of positions Unauthorised undertaking of transactions Insider trading Theft Robbery Forgery

13. contd….. External Fraud External fraud refers to theft or fraud carried out by a third party outside the organisation. Eg Computer hacking damage and theft of information

14. Contd…… Employment Practices and Workplace Safety This category refers to events relating to employee relations , safe working environment and discrimination. E.g.: Employee compensation claims Wrongful termination. Violation of health and safety rules Discrimination claims Harassment

15. Contd…… Clients, Products and Business Practices Operational losses in this category arise from a failure to meet an obligation to a client or from the nature or design of a product. eg misuse of confidential client information Money laundering Product defects Exceeding client exposure limits

16. Damage to Physical Assets This category accounts for losses as a result of disaster and other events. Eg: Natural disaster Terrorism Vandelism Contd……….

17. Contd……. Business Disruption and System Failures Hardware and software failures telecommunication problem Utility outages and disruption

18. Contd… Execution, Delivery and Process Management This category covers risk events related to transaction processing or process management , trade counter parties and vendors. Eg: Miscommunication Data entry errors Accounting errors Unapproved accesses given to client account Vendor disputes Outsourcing

19. Case Studies 1SBI – IT Related SBI, UK’s Treasury operations use the Reuters 3000 dealing system. Dealers negotiate and confirm various deals . Deals were posted manually into the banking application. Risk of error prone entries, missed out deals, lack of suitable and timely checks & verification and inability to ascertain accurately counter party dealing limits. Requirement : ‘Straight through Processing’ from Reuters dealing server to the Misys-Equation platform to minimise operational risk.

20. Solution Technologies such as Microsoft Windows 2000 server, Access database, IBM MQ series, Misys Meridian middleware and IBM AS/400.

21. The process can be categorized as follows: • Electronic capture of deals via Reuter Ticket Output Feed (TOF).• Deal data processing with data validation and writing to database.• Deal data mapping, formatting and posting to Misys Equation using Meridian Middleware/IBM MQ Series.• Secure and user-friendly interface to monitor flow of deal data, correct any exceptions and review status of posting into Misys Equation.• Intelligent use of Reuters Current Interest Feed (CIF) to retrieve counter- party dealing limits and actual exposures from the Equation banking system and displaying the same back to the dealers.