Summary of Risks
The following brings together all the risks described elsewhere in the book. For convenience they are grouped by general categories. Some risks not previously mentioned are included for completeness.
GENERAL COMMENT - UNFORESEEN RISK
No stakeholders in a business - investors, managers, employees or customers - want unforeseen risk. Due to its sudden effect, the organisation is ill-equipped to deal with it and its consequences are unknown. One of the major causes of the recent credit crunch was the failure of many organisations to take into account a particular risk: that so many American subprime mortgage borrowers would be unable to repay their debt. Unforeseen risk points to poor management and supervision and reduces confidence in the financial entity. If risk is present, it should be known about and then sensible decisions can be taken about how to manage it.
OPERATIONAL RISK (IN THE TRADE LIFECYCLE)
The longer mistakes remain in the trade lifecycle, the more costly they are to correct. Here we list some of the common risks associated with the lifecycle.
Confirmation: a poor confirmation causes delays in the processing and settlement of a trade. This increases the probability of settlement risk occurring. Moreover, since confirmation is a two way process, other organisations will quickly see mistakes and sloppy practices, and these damage the reputation of the firm.
1. Theft: a big risk in the settlement process is theft. This could ...