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ICAAP Key Risks: Operational Risk

What is Operational Risk?

What should be considered when assessing operational risk and how can operational risk be defined?

Operational Risk

The operational risk might be the risk of loss resulting from inadequate or failed internal processes, people and systems of from external events – including legal risk.

For UCITS and Alternative Investment Firms (AIF), this risk might be the risk of loss resulting from inadequate internal processes and failures in relation to the people and systems of the management company or AIFM.

In addition, it could also be the risk from external events or from legal and documentation risk.

It could also be the risk resulting from the trading, settlement and valuation procedures operated on behalf of the fund.

Operational Risk Definition

Within the EU Capital Requirements Regulations (EU CRR Article 4.1(52)) “Operational Risk” means:

“the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk”

EU CRR 4.1(52)

Operational Risk Considerations

The regulators will expect for firms to take a broad approach to identifying their operational risks - some examples of operational risks to consider might include:

dealing errors,

reputational risk,

conduct risk,

cyber-crime; and

IT risk

In addition, it would be wise for firms to consider what operational issues their peers may have encountered, as well as those from the firm's own past experiences.

The ICAAP Document will need to justify how a firm uses operational risk models and interprets their results and stance.

Related Reading - see also:

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