Business Execution

From Open Risk Manual

Definition

Business Execution (in more detail, Execution, Delivery and Process Management) is the risk of unexpected financial or reputational loss as the result of poor execution of regular business tasks. It is a recognized risk category in regulatory frameworks worldwide (Basel II standards). The precise Basel II definition is: "Losses from failed transaction processing or process management, from relations with trade counterparties and vendors"

Basel Level 2 & 3 Event Type Classification

  • Transaction Capture, Execution & Maintenance
    • Miscommunication
    • Data entry, maintenance or loading error
    • Missed deadline or responsibility
    • Model / system misoperation
    • Accounting error / entity attribution error
    • Other task misperformance
    • Delivery failure
    • Collateral management failure
    • Reference Data Maintenance
  • Monitoring and Reporting
    • Failed mandatory reporting obligation
    • Inaccurate external report (loss incurred)
  • Customer Intake and Documentation
    • Client permissions / disclaimers missing
    • Legal documents missing / incomplete
  • Customer / Client Account Management
    • Unapproved access given to accounts
    • Incorrect client records (loss incurred)
    • Negligent loss or damage of client assets
  • Trade Counterparties
    • Non-client counterparty misperformance
    • Misc. non-client counterparty disputes
  • Vendors & Suppliers
    • Outsourcing
    • Vendor disputes

Examples by Business Line

Types of execution errors vary by business line. An indicative list:

  • Corporate Finance: Inaccurate/incomplete contracts, Transaction errors, Staff errors
  • Trading and Sales: Data entry errors, model risk
  • Retail Banking: Pricing errors, failures of external suppliers
  • Commercial Banking: Failure to follow procedures, incomplete loan documentation, processing error
  • Payment & Settlement: Data entry error, failure to follow procedures
  • Agency Services: Processing error
  • Asset Management: Mismanagement of account assets
  • General: Inaccurate financial statements, vendor failure, tax non-compliance

Mitigation

Risks in this category can be mitigated by clear and tested procedures and policies, up-to-date systems, employee training and strong internal controls comprising of policies and rules complying with the expected standards.

Issues and Challenges

  • As with all Operational Risk types, it is difficult to obtain objective measures of the actual risk, both before and after the application of controls

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