Quality Control

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Quality Control Operational Risk November 2003
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Agenda

• Introductions
• Outline of a Derivative Transaction
• Quality Control in Financial Services where are
  we in relation to other industries
• War Story

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Outline of a Derivative Transaction
Example Ford Motor company (FMC) wishes to
begin manufacturing in an Eastern European
country and does not want exposure to currency
risk. FMC issues a bond for HUF 20bn paying a
fixed HUF rate, then swaps the HUF currency risk
into USD with an investment bank
Trade Data 1bn/HUF20bn FMC pays fixed
amount Broker Dealer assumes floating ccy
risk Option to call in 5 years
Operational Activities Confirm economic
data Perform margin procedures Produce
Confirmations Settle any cashflows
Economic Risks- What is the cost of confirming
the first decimal incorrectly How soon will a
mistake be identified Are the right ISDA terms
used and agreed what is the cost of an
incorrect calculation agent
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Quality Control in Financial Services where are
we in relation to other industries

• A Bit of History
• No weighting was given to the Operational risk
  associated with a transaction though there was
  obviously thorough thought and analysis given to
  the credit and economic risk of the trade. It is
  only within the last 5 years the financial
  industry has thought about this risk.
• Operational Failure Risk
• Over the last few years we have actively applied
  resources to this issue of Operational Risk and
  sought analogies in the insurance and engineering
  world to better understand and to quantify the
  Operational risk associated with a transaction
• Why
• Avoid catastrophic loss
• Apply smart exception processing and
  prioritizing
• Provide data for analysis to avoid re-occurrence
• Apply infrastructure investment more
  scientifically

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Quality Control in Financial Services what are
we looking for
In building an Operational Risk Model we apply
three broad factors People Risk As in any
industry, employees operate at different levels
of competency generally based on experience- I.e
apply a weighting to years of experience Fraud
understand here the opportunity for fraud could
occur Process Risk This risk increases
exponentially with the maturity of a process I.e.
Derivative transactions have a higher degree of
risk than an equities transaction. However,
equities may face an entirely different risk of
capacity constraints. Technology Risk This is
the most transparent to understand but not the
easiest to quantify
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War Story
Unfortunately there are multiple stories.
Tonight we can talk about AIB.