The IAFE’s Operational Risk Committee Releases
White Paper on Operational Risk for the Buy Side

The Operational Risk Committee of the IAFE announced today the release of its white paper on Operational Risk for the Buy Side. The report is based on an IAFE panel discussion on operational risk for the buy side that was hosted by the IAFE’s Operational Risk Committee and Investor Risk Committee on October 3 in New York.

The report concludes that a key component in managing operational risk is the establishment of a “lessons learned” culture, with a stress on debriefing after a blow-up happens in another institution and a honest consideration as to whether such an event can happen in one’s own institution. Although many buy side companies do not have regulatory mandates to manage their operational risks, the report asserts that their greatest risk emanates from relationships with clients. Managing this risk requires a culture that highly values client relationships, closely monitors sales literature, and compensates employees based on the depth of client relationships, rather than the generation of fee income. The conclusion of the October white paper is that, at its core, good operational risk management is about “doing the right thing.”

The participants in the IAFE panel discussion that served as the foundation of this white paper were: Allan Cuttle, Deutsche Bank; Charles Fishkin, Fidelity Investments and Co-Chair of the Operational Risk Committee; Jon Lukomnik, Sinclair Capital; Leslie Rahl, Capital Market Risk Advisors and US Chair of the Investor Risk Committee; Theresa Schnepf, JP Morgan Fleming Asset Management. Penny Cagan, Zurich Financial Services, and Monique Miller, Caxton Associates – both Co-Chairs of the Operational Risk Committee – and David Syer, Algorithmics, were also involved in the creation of the white paper.

The IAFE’s Operational Risk Committee was formed in 2000 with the mission to promote dialogue among members and the broader risk management community to further understanding, share best practices and promote industry standards regarding operational risk. The committee is composed of individuals with a range of backgrounds, including dealers, end-users, industry advisors, operational risk specialists, technologists, regulators, scholars and others. Members serve on the Operational Risk Committee in their individual capacities as opposed to as representatives of their respective employers or organizational affiliations.

The IAFE’s Operational Risk Committee’s October 2002 White Paper on Risk Management for the Buy Side and earlier reports can be viewed on the IAFE’s web site, www.iafe.org.

About the IAFE:
The IAFE is a professional society dedicated to fostering the profession of quantitative finance by providing platforms to discuss cutting-edge and pivotal issues in the field. Founded in 1992, the IAFE is composed of individual academics and practitioners from banks, broker dealers, hedge funds, pension funds, asset managers, technology firms, regulators, accounting, consulting and law firms, and universities across the globe.

For more information on the Operational Risk Committee or the IAFE, please contact the IAFE office at (212) 317-7479.