Operations Risk in Extreme Market Conditions

Sergio Scandizzo

In the aftermath of the 2008–09 financial crisis, commentators and regulators focused mainly on credit risk (as the primary cause) and on prudential regulation overhaul (as the primary remedy). Operations practitioners, however, and also the savviest risk managers, learned also a few other critical and highly practical risk management lessons. These lessons revolved around the challenge of providing continuity to operations in extreme market conditions, the threat to the business from the default of key counterparts and/or agency services providers, the gap between the complexity of operations conceived in the front office and the tools available in the back office to handle them. This chapter will look at the crisis from a back-office perspective, and will draw on real life cases as well as from the possible scenarios they suggest. It will close with a discussion of the controls and procedures that can help mitigate the risks of those scenarios.

FINANCIAL CRISES FROM A BACK-OFFICE PERSPECTIVE

In their seminal book Managing the Unexpected, Karl Weick and Kathleen Sutcliffe explore the management of risk in what they call high reliability organisations (HRO), organisations that