Operational risk

Operational risk management can be defined as ensuring:
Ω The limits and controls are unambiguous and appropriate for the on-going
business
Ω The day-to-day mark to market and corresponding risk reports are correct
Ω Limits are monitored and breaches alerted in line with predefined procedures
Ω Data and system integrity (including trade input errors)
Operational Risk area is both the most important area under the remit of risk
management but is often given least attention outside the periodic audit review.
Within energy it is virtually impossible to quantify the value of operational risks. It
is often seen as a pure audit or control function adding little value to the enterprise
beyond the ‘let’s keep the auditors happy’ once a year. The operational risk manager
often has thus a ‘no-win’ role of unnecessary bureaucrat in the good times and fall
guy when things go wrong. The role also sits awkwardly between the market/credit
risk functions, the operational accounting functions, the internal audit functions,
the IS department and any front-office operations. As such it is the least well defined
and least emphasized area of risk management.
However, the majority of the big trading losses within the energy business, as well
as other trading businesses, can be traced back to inadequate controls or reporting.
Extreme volatility and a developing market make operational risk management all
the more important.