Appendix A Operational Risks
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.
Settlement
Settlement is where money changes hands and so some important risks are associated with it.
Theft
A big risk in the settlement process is theft. This could occur where the settlement process is intercepted by criminals or where staff involved in the process (including those writing or operating a computerised settlement system) divert part or all of the money to their own bank accounts.
Cost of recovery
Even if there is no attempt to deliberately steal money, there may be a significant cost in recovering it, not to mention severe embarrassment, if the settlement process goes wrong and money is transferred to the wrong account; too much is transferred to the correct account; or the transfer is on the wrong day or at the wrong time.
Legal
Settlement is a legal obligation arising from execution of a trade. A counterparty risks being sued by the wronged party if it fails to settle the right amount at the right time and according to the given settlement instructions. ...
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