Tullett Prebon plc Annual Report 2010
3. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people activities, systems or external events. Operational risk covers a wide and diverse range of risk types, and the overall objective of the Group’s approach to operational risk management is not to attempt to avoid all potential risks, but proactively to identify and assess risks and risk situations in order to manage them in an efﬁcient and informed manner. Examples of operational risk include: – IT systems failures, breakdown in security or loss of data integrity; – Failure or disruption of a critical business process, through internal or external error or event; – Failure or withdrawal of settlement and clearing systems, errors in instructions; – Events preventing access to premises, telecommunications failures or loss of power supply which interrupt business activities; and – Broker errors. Operational risks are managed through a combination of effective, relevant and proportional control processes and experienced managers who are alert to the risks involved in the business they process. As with credit and market risk the policy of devolved responsibility within the Group places the initial emphasis for the management of operational risks on the senior management of each entity and business unit. Finance, Operations, Compliance, Risk Control (reporting), Internal Audit, and the administrative functions support management through a segregated review process of the controls. 4. Strategic and business risk The Group operates in an environment characterised by intense competition, rapid technological change and a continually evolving regulatory framework. Failure to adapt to changing market dynamics, customer requirements or the way OTC markets and their participants are regulated constitutes a signiﬁcant long term risk. The Group’s strategies for managing and mitigating these risks include geographic and product diversiﬁcation, the continued development of new products and the Group’s electronic broking capability, and where appropriate, acquisitions. Regular management review of results and key performance indicators, competitor benchmarking and active management of client relationships all act as controls on the Group’s strategic and business risk.
In addition, the Group maintains active dialogues with regulators and other competent authorities responsible for the drafting and implementation of relevant regulatory reforms, to ensure that any changes to the regulation and operation of OTC markets achieve their stated objectives and avoid unintended negative consequences. 5. Governance risk Governance risk is the risk of loss or damage to the business arising as a result of a failure of management structures or processes. This includes failure to adhere to applicable corporate governance requirements (such as those imposed by the UK Corporate Governance Code), a failure to ensure adequate succession to key management positions, or the inappropriate use of authority and inﬂuence by current or former senior members of staff. The risk of accounting error or fraud is mitigated by the strong control environment which exists within the Group, in particular the involvement of the Audit Committee, the Internal Audit function and the Group Treasury and Risk Committee. Succession planning within the Group is overseen by the Board. 6. Regulatory, legal and human resource risk This risk concerns the potential loss of value due to regulatory enforcement action (such as for breaches of conduct of business requirements or market abuse provisions); the possible costs and penalties associated with litigation; and the possibility of a failure to retain and motivate key members of staff. The Group also faces the risk that changes in applicable laws and regulations could have a serious adverse impact on the business. The Group’s lead regulator is the FSA, but the Group is also subject to the requirements imposed by the regulatory framework of the other jurisdictions in which the Group operates. The Group’s compliance ofﬁcers monitor compliance with applicable regulations and report regularly to the Board. The Group’s legal department oversees contracts entered into by Group companies, and manages litigation which arises from time to time. Salaries, bonuses and other beneﬁts are designed to be competitive and the Group’s HR function monitors staff turnover on an ongoing basis. 7. Reputational risk Reputational risk is the risk that the Group’s ability to do business might be damaged as a result of its reputation being tarnished. Clients rely on the Group’s integrity and probity. The Group has policies and procedures in place to manage this risk to the extent possible, which include conduct of business rules, procedures for employee hiring and the taking on of new business.