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Risk Management Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect

of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. The strategies to manage threats (uncertainties with negative consequences) typically include transferring the threat to another party, avoiding the threat, reducing the negative effect or probability of the threat, or even accepting some or all of the potential or actual consequences of a particular threat, and the opposites for opportunities (uncertain future states with benefits). In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss (or impact) and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process of assessing overall risk can be difficult, and balancing resources used to mitigate between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled. Risk management also faces difficulties in allocating resources. This is the idea of opportunity cost. Resources spent on risk management could have been spent on more profitable activities. Again, ideal risk management minimizes spending (or manpower or other resources) and also minimizes the negative effects of risks.

Case 1: Regulatory Requirements for Asset Securitization The client is an international bank with European roots with a clear focus on consumer and commercial clients in some key local markets and a global focus on select multinational corporations and financial institutions, as well as private clients. It is a leading participant in the asset securitisation market, having significant exposures to traditional and synthetic programmes as originator, sponsor and investor. CHALLENGES FACED : They wanted to implement new enrichment data, calculations, systems, processes and reporting to be compliant at the advanced level. Without successful and timely accomplishment of these, the bank would not realise the reductions in capital requirements intended to be achieved by some of its securitisation transactions. APPROACH AND SOLUTION : Avantage Reply used its knowledge, expertise, and experience to identify the key area of focus. Thus provided the consistent core of the project in a number of facets and through a series of phases. Definition of the growing inventory of programmes in the scope of responsibility Documenting the structure of the programmes and detailing the clients roles in them Sourcing previously unavailable asset data programme and the underlying asset enrichment information Transferring knowledge to the business-as-usual resources Regularly reporting progress to the various senior stakeholders (e.g., Group Basel II asset securitisation project, Business Unit Basel II project, UK Finance). RESULTS AND BENEFITS : The client has successfully commenced external reporting and realised the reductions in capital requirements intended to be achieved by some of its securitisation transactions.

Case 2 : Foreign Exchange Risk Management Capability The client is European Investment Bank. The client maintains a single currency ledger. All non-functional currency transactions are translated at the rate prevailing on the trade date. THE CHALLENGE The client maintains a single currency ledger which does not capture the distinction between realised and unrealised exchange differences arising from nonfunctional currency transactions, resulting in an inability to manage FX rate risk. The effect of variations in exchange rates is reflected daily through the profit and loss account. However, the distinction between realised and unrealised exchange differences is not captured and the open positions that give rise to continued FX exposure are not identified or quantified and therefore not managed. APPROACH AND SOLUTION Avantage Reply used its knowledge, expertise, and experience to identify the key area of focus.The approach taken was to: Agree a methodology for inventory/position valuation (assumed first in first out basis) Review all position data to ensure comprehensiveness for valuation purposes (i.e., all relevant data captured to enable valuation to be undertaken), timeliness and accuracy Define the data fields to be captured where absent Define an algorithm for calculating potential exposures for all traded products Ensure the capture and accounting for corporate actions Provide policy recommendations for the management of FX transaction and translation risk RESULTS AND BENEFITS All of the above was delivered in a report submitted to Treasury and IT which became the basis of a functional specification used by IT to develop the appropriate data capture systems and exposure measurement engine for identifying and quantifying all FX transactional exposures.