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Agnieszka Wojtasiak
Operational risk in the derivative markets - classification and limiting methods
In 1990s a considerable part of financial disasters related to derivatives was caused by operational risk. The losses incurred as a result of operational risk by institutions like Barings Bank, Daiwa Bank or Procter&Gamble are an example of the phenomenon. Such events contributed to the increase in the significance of the operational risk in comparison to other types of risk which entities operating in the derivative market face.
The goal of the article is to provide a comprehensive classification of operational risk in the derivative market and discuss selected methods of reducing the risk. The different kinds of operational risk are classified into the following categories:
- risk due to relations with the environment, entailing for instance the damage to the company's reputation;
- risk due to personnel activity, resulting from conscious or accidental actions of the employees to the employer's detriment;
- risk due to technology applied, concerning faulty technological solutions in the conducted transactions;
- risk due to documentation procedures, related to keeping records.
Managing the operational risk is conducted both within the institution and through interactions with the environment. The internal control and regulations in the organisation attempt to create methods, tools and procedures for the analysis and control of the operational risk, limiting human error scope and preparing instruments for managing documentation risks. Limiting the operational risk is also based on maintaining appropriate relations with the environment, which consist mostly in adapting to operational risk regulations. The article also discusses selected documents citing the international standards on operational risk management.
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