Identifying and managing specific risks
Within the derivatives operations environment, the use of systems
and technology is extensive. Everything from SPAN and TIMS margin
calculations to value-added services to clients are run on in-house
and/or external systems. Important interfaces exist for processes
such as trade registration and clearing with the clearing house,
as well as in some cases the process for submitting exercise and
tender notices between client and broker and broker and clearing
house.
It is therefore important to understand the operational risk that
exists in the form of system or technology risk.
System/Technology risk
This risk can include the following:
• Inadequate controls over the input and management of static data
in the systems. This will cover critical data such as:
– Contract size
– Tick size and value
– Expiry/maturity dates
– Option styles.
• Inability of systems to handle specific types of derivative products:
– Margin method
– Settlement and/or MTM calculation (VM, option premium).
• Lack of knowledge of the systems capabilities by staff and
management.
• Inability to provide vital risk management information. This will
include:
– Exception reports;
– Client money calculations;
– Margin reconciliation;
– Exercise and assignment data including positions that are
in-the-money and are likely to be exercised or assigned;
– Expiry calendars and times.
With so much reliance on systems to provide not only vital internal
functions but also client services such as single currency settlement,
average pricing and direct client access to data via intranets, etc. any
system failure, corruption of data in the system, unauthorised access
or delay in setting up a new client or product on the system is a signifi-
cant risk to the business.
158 Clearing and settlement of derivatives
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