Non Financial Risk

Non-Financial Risk

What are Non-Financial Risks? •

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Any issue that could cause reputational harm to a business is a non-financial risk These cover a far wider scope than purely financial ones Non-financial risks are more open to issues and actions within a supply chain These can often be perceived to be beyond a business’s sphere of influence

http://www.sustainableresponsible.com/nonfinancialrisks.html

Types of Non-Financial Risks •

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Operational Risk (fraud, misconduct, failure of internal controls or audit systems, natural disasters) Settlement risk Accounting risk (changes in GAAP/IFRS and comparability issues, managed earnings, etc.)

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Regulatory risk

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Legal risk (counterparty does not honor a contract)

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Tax risk

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Sovereign risk (if you are trading EM debt for example) & Political risk

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Performance netting risk

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Key Man risk

Operational Risk •

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An operational risk is defined as a risk incurred by an organisation's internal activities. It focuses on the risks arising from the people, systems and processes through which a company operates It can also include other classes of risk, such as fraud, and legal risks, physical or environmental risks

http://en.wikipedia.org/wiki/Operational_risk

Operational Risk •

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Acoording to the Basel II regulations Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events Operational risk management differs from other types of risk, because unlike other risks such as credit risk and market risk, it is not used to generate profit

http://en.wikipedia.org/wiki/Operational_risk

Settlement Risk •

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Risk that counterparty does not deliver a security/value in cash as per agreement when the security was traded after other counterparties have done so Eg of settlement risk - foreign exchange/ crosscurrency settlement risk Mitigating risk  –  –  –

Delivery versus payment Settlement via clearing houses Foreign exchange settlement using continuous link settlement

http://en.wikipedia.org/wiki/Settlement_risk

Accounting Risk •

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Accounting risk is the concept that a company's financial statements may have to be recalculated because of fluctuations in currency exchange rates It is also known as accounting exposure or translation risk. The phrase refers to the possibility of recalculation and doesn't necessarily imply that the effect will be unfavorable The problem of accounting risk comes when a company owns assets listed in a foreign currency

http://www.wisegeek.com/what-is-an-accounting-risk.htm

Regulatory risk •

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The risk that a change in laws and regulations will materially impact a security, business, sector or market A change in laws or regulations made by the government or a regulatory body can  –

Increase the costs of operating a business

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Reduce the attractiveness of investment

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Change the competitive landscape

http://www.investopedia.com/terms/r/regulatory_risk.asp

Legal risk •

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Legal risk is a risk of loss that results from a counterparty being unable to legally enter into a contract

Another legal risk relates to regulatory risk, i.e., that a transaction could conflict with a regulator's policy or, more generally, that legislation might change during the life of a financial contract

http://en.wikipedia.org/wiki/Legal_risk

Political risk •

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The risk that an investment's returns could suffer as a result of political changes or instability in a country Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control Political risk is also known as "geopolitical risk," and becomes more of a factor as the time horizon of an investment gets longer

http://www.investopedia.com/terms/p/politicalrisk.asp

The most important risks faced by Corporates

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Risk Management

Good Practices for Management of  Non-Financial Risks Improving control over segregated assets When assets that can be safe-kept are entrusted to third parties as may be required when investments need to be held locally in a country the segregation of assets is the first line of  defence Assets should be held in a segregated account in the name of the depositary in the books of the counterparty as opposed to be held in a pool with those of other clients (omnibus segregation), or left un-segregated •

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http://faculty-research.edhec.com/_medias/fichier/edhec-publication-proposals-for-bettermanagement-f_1361798075210-pdf 

Good Practices for Management of  Non-Financial Risks Reducing Counterparty Risks: Central Counterparties an Tripartite Agreements •

Counterparty risks can be reduced by regulatory initiatives such as the creationof  central counterparties (CCPs), which legally interpose themselves between the counterparties to the contracts and

http://faculty-research.edhec.com/_medias/fichier/edhec-publication-proposals-for-bettermanagement-f_1361798075210-pdf 

Benefits of risk management for Corporates

Ref : Servaes,Tamay o, Tuffano, “ The theory and 15