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Safeguarding Success: Tackling Operational Risk in FRM® Course | EduPristine

Safeguarding Success: Tackling Operational Risk in FRM® Course | EduPristine

Welcome back, learners, to another insightful blog post on Operational Risk within the FRM® Course curriculum . In this post, we’ll explore the essence of operational risk, its underlying causes, different categories, and practical strategies for prevention. We’ll also discuss how you can master this crucial topic through the FRM® course subjects offered by EduPristine, equipping you with the knowledge and skills needed to excel in the field of FRM.

What is FRM® Course?

FRM® stands for Financial Risk Manager; so as the term suggests this course is all about in depth study of Risk Management. This designation is offered by GARP® i.e., Global Association of Risk Professionals.

What is Operational Risk?

Let me breakdown the concept of operational risk for you. So firstly, operational risk consists of people, systems, processes & external events i.e., the day-to-day business activities; these activities can trigger operational risk. Secondly risk occurs because of these flawed or failed processes, systems etc. Operational risks aren’t like credit or market risk because those are all dependent on financial transactions & market fluctuations.  

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How is Operational Risk caused?

1. People You might be wondering how “people” & “operational risk” interconnected? So let me simplify it for you; a particular company needs someone to address their problem at hand, but they don’t have employees with the correct skillset. On the other hand, there can also be the issue that the company is unable to pay heed to the problems that are on a high priority due to which they would be needing more employees. Obviously to take care of problems like these the firm will turn to the market to hire new employees with the correct skillset but at the same time make sure to check their background in depth to be assured that their history does not include any fraudulent incidents. 2. Processes Now every firm has a process for everything, and it surely differs from industry to industry and even in between firms of the same industry. It is of utmost importance to note all the processes making sure to even note if any changes occur and have a track record of the same. In this way a firm can mitigate the operational risk caused by processes.  

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3. Systems Here we consider both software & hardware systems. If a firm is using X software they should keep in check about the updates, policies etc. to make sure that their data is safe. Coming to hardware to operate the software the firm should make sure to have the device of the exact compatibility so that they are not behind on technology aspect. If they are outdated, then there is an operational risk as the business works or relies on that tool. 4. External Events Covid 19 is the best example of external event affecting many firms at a large due to which a few companies shut down and some are still stable. Similarly many other external events such as hurricanes, wildfires can affect a firm’s logistics. Hence it is important to take notes of the external events and make sure to build up tactics on how a firm can deal with it in case it occurs.

7 Categories of Operational Risk

1. Internal fraud Internal fraud means the employees causing disruption within the organization i.e., being dishonest for personal gain, submitting fake bills to get reimbursement, taking office supplies, accepting bribery from vendors etc. which can cause operational risk. 2. External fraud External fraud consists of many factors that a firm needs to keep in check. External parties can go up to the limit of using up a firm’s critical or confidential information for fraudulent uses such as phishing, cyber-attacks, money laundering etc. 3. Technology failures As discussed above, how systems can cause operational risk technology failures is on the similar lines too. Many firms using AI & ML need devices which are smooth to work on so that the code works swiftly & it does not hang. Failure to do so would cause technological failures which is very harmful for a firm who is wholly dependent on automation etc.  

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4. Process execution If a process is not executed in a correct way it can lead to operational risks. If in case, there is a human error in data entry or accounting it can be negative as the reports would be faulty and can lead to misleading decision making. 5. Safety This category of operational risk is simple. It just states that any concern(s) regarding safety in the workplace, be it physical, mental or any other, should not be violated. 6. Natural disasters Like external events, natural disasters also pose a challenge of operational risk. Any natural calamity, frequent weather changes etc. can lead to disruption for a firm depending on which industry they are in. 7. Business practices Business practices should not include misleading advertisements, information which is not backed by facts, selling defective products etc. as this can lead to operational risks and have a negative impact on a business.

Tips to prevent Operational Risk

1. Identify operational risks As the name suggests, a firm must identify & minimize the operational risks. How they can do this is by first making a note of all the factors causing the risk. It can be done by using SWOT analysis & other metrics feasible for the firm. Moving on to analyzing the causes and working on communicating it by simultaneously involving relevant stakeholders such as managers, employees, customers, suppliers etc. 2. Assess operational risks Assessing risk is basically evaluating the list of risks the firm has identified. Making sure to put them into chronological order i.e., highest to lowest. Heat maps and other matrix are useful to envision and compare one risk to another.  

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3. Mitigate operational risks Mitigating the operational risks is basically making a plan as to which risk is unavoidable & acceptable but up to an extent and accordingly working on it at the same time noting the effectiveness of the same. 4. Manage operational risks Tips 1- 3 are not just a one-time activity in fact a firm has to continuously do this in order to identify new risks, assess them and find new ways to mitigate which will in turn be productive & effective for the firm. It’s also important to track and document your risk performance and results, as well as to reflect on your achievements and shortcomings. Operational risks may be managed using a variety of frameworks and techniques, including risk dashboards, risk indicators, audits, reviews, and risk cultures.  

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5. Improve operational risks A firm needs to make a note that they need constant operational improvements based on the outcome of mitigating the risks. Managing people, processes, systems & external events in the correct way can lead to being lesser prone to operational risks. Surely it cannot be avoided but having a cycle of mitigating them and working on them is surely a plus point. 6. Learn operational risks Last but not the least is to have knowledge & relevant skills. Not only will this help in being competitive but also be updated as to what is going round. One can surely learn about this by institutes or firms offering the relevant course.

FRM® Course offered by EduPristine

Conclusion: So here we come to the end of this blog post. Hope you now have a basic understanding of the market risk in the FRM® Course. If you’re eager to know more about the FRM® course details, FRM® course fees, FRM® course duration, FRM® course eligibility, FRM® course syllabus & how to apply for FRM® courseconnect with the EduPristine team ASAP on the handles mentioned below. See you in our next blog post until then keep learning, keep growing.
Virendra Yadav

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