The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external eventsFor emergence of such a risk four causes have been mentioned and they are people, process, systems and external factors.
(a) People risk – Lack of key personnel, lack of adequate training/experience of dealer (measured in terms of opportunity cost/employee turnover), unauthorised access to the dealing room, tampering voice recorders, nexus between the front and back offices, etc.
(b) Process risk – Wrong reporting of important market developments to the management resulting in faulty decision making, errors in entry of data in deal slips, non-monitoring of exposure in positions, loss of interest owing to the liquidity beyond prescribed limits, non-revision of card rates in cases of volatility, non-monitoring of closing and opening positions, wrong funding of accounts (wrong currency, wrong way swap), lack of policies, particularly in respect of new products.
(c) Systems: Losses due to systems failure such as NDS — not maintaining secrecy of system passwords.
(d) Legal and regulatory risk: Treasury activities should comply with the regulatory and statutory obligation . It is necessary that formal policies are in place with respect to trigger limits; stop loss limits; prudential limits; well defined procedures and check lists; effective internal controls and audit; insurance, wherever possible; business process re-engineering to eliminate weak links in the process chain; prudential limits on investments in banks; cap on unrated issues and private placements; sub-limits for PSU bonds, corporate bonds and guaranteed bonds; same degree of credit risk analysis in the case of any loan proposal; and more stringent appraisal for non-borrower issuers.
