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It is rare for two frameworks to look exactly the same. Policies also often have references to categories and sub-categories of risk, to the role that central risk plays in the firm (as compared to the risk management units in the businesses) and to the risk reporting flows of information.In smaller organisations, the three functions overlap and the policy must be consistent with the scale, nature and complexity of the firm. Clear roles for these three areas must be documented. This point is particularly applicable to any firms where operational risk management was initially carried out by either internal audit or compliance. It is important that the Board recognises and actively manages the potential conflicts of interest that exist between operational risk, internal audit and compliance. A statement of the roles and responsibilities of various persons and departments.A very short description of each process is common with the links and reinforcements between each process often stated in order to show a considered, holistic approach to operational risk management. Although this is necessarily high level, it helps significantly in making clear that the Board and senior management are aware of and have considered how operational risk management will be carried out by the firm. An overview of the risk management processes.This is often a high level initial statement which will be broadened and deepened over time as the firm gains knowledge of the operations of risk management processes and how these are used in the firm. However, it is more unusual for the boundaries between operational risk, market risk ands credit risk to be clearly identified, although definitions of the other types of risk are often included. Strategic business and reputational risks are often explicitly included by firms even though Basel excludes them. This is now typically the Basel II definition although some firms still include a reference to indirect losses as well as to direct losses. The contents of an operational risk policy vary from firm to firm and are dependant on the firm’s culture.
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Alternatively, in some firms, the Executive or Management Committee may wish to approve the policy document or at a minimum, review and comment on it prior to Board approval. As such, the policy should be approved by the Board of Directors. It allows senior management to communicate to all staff the approach of the firm to operational risk management. Operational Risk Policyįew now doubt the advantages of having a documented operational risk policy. From a practical perspective, this will encompass a policy document approved by the most senior executive body of the firm a framework showing the identification, measurement, monitoring and management of operational risk terms of reference for relevant bodies and, a timeline for tracking and reviewing the development of operational risk processes within the firm. Operational risk governance, in common with other forms of corporate governance, is about enabling senior management to guide and direct operational risk strategy and to review its effectiveness. There are also many other governance requirements either in existence or in draft that will apply to the risk management of a financial services institution. The European Union, through its draft of the Capital Requirements Directive also requires robust governance arrangements in relation to risk management. Good risk governance is required by the FSA through its Principles for Business (Principle 3).