Operational Risk and its Management

Until the year 2000 the management of energy-price risk was focused mainly on market risk, liquidity risk and credit risk. But over the past few years, there has been a new focus on operational risk, particularly after some big failures in the financial commodity markets. The author describe “Operational Risk” as the risk of loss caused by failures in operational processes or the I.T. systems that support them, including those adversely affecting reputation, legal enforcement of contracts and claims. Most organizations can be affected by operational risk in a number of ways, both directly and indirectly. This chapter explains the key components of operational risk. The core objective of an operational-risk program should be to avoid financial and non-financial losses arising from operational risk failures. The chapter also describes how through more efficient and effective measurement and reporting of operational risk using a systematic approach, an organization will be able to anticipate risks.