ISDA ISSUES DISCUSSION PAPER ON OPERATIONAL RISK CAPITAL CHARGES

The International Swaps and Derivatives Association (ISDA) today issued the 'Operational Risk Regulatory Approach Discussion Paper'. This paper argues that a set of qualitative criteria should form an integral part of the regulatory appraisal of operational risk management by financial institutions.

The paper was produced with the active support of a number of global financial services institutions [listed in the editors notes below] and facilitated by a dedicated team of operational risk and regulatory consulting specialists from PricewaterhouseCoopers, the professional services organisation. The paper consists of three main sections:

An appendix deals with emerging operational risk management practice. In addressing qualitative issues, the paper adopts a set of assessment criteria that are structured, objective, focused and transparent, to complement the operational risk data requirements currently proposed by regulators.

Richard Metcalfe, ISDA Assistant Director of European Policy, observed: "It is essential for financial institutions that the new capital framework incorporates the correct incentives and risk-sensitivity with regards to operational risk and its management. This paper represents an industry view on how this could be achieved." Andrew Gray, Partner, PricewaterhouseCoopers added: "We fully support this ISDA initiative to progress the debate about operational risk capital charges. The challenge for regulators and financial services institutions is to develop a global standard for operational risk that: promotes the development of operational risk management best practices; and allows institutions that are able to demonstrate better operational risk management to be allocated a lower operational risk capital charge."

Richard Metcalfe concluded: "Coincident with the reform of capital rules, operational risk management is a discipline that is reaching new levels of sophistication. An important aspect of the approach that ISDA is proposing is that it is flexible enough to accommodate future developments in operational risk management, while offering a basis for assessment today."

ISDA is the industry association for the world's leading participants in swaps and other privately negotiated derivatives transactions. The association's members, currently numbering over 500, include banks and other financial institutions, government entities, corporations and professional service providers.

Notes to Editor:

1 Copies of the 'Operational Risk Regulatory Approach Discussion Paper', dated September 2000, are available at www.isda.org. ISDA will also shortly be publishing the 'ISDA 2000 Operations Benchmarking Survey: Over-the-Counter Derivatives Operations Issues'. In December 1999, ISDA published together with RMA and the BBA a focused study on operational risk management entitled 'Operational Risk - The Next Frontier'.

2 The following ISDA member firms contributed to this paper: ABN AMRO, Barclays, Bank of America, Bank of Tokyo-Mitsubishi, BBV-Argentaria, BNP Paribas, CIBC, Chase Manhattan Bank, Citibank, Credit Suisse Group, Deutsche Bank, Dresdner Bank, Halifax, JP Morgan, Lloyds TSB, Merrill Lynch, Royal Bank of Scotland, Standard Bank of South Africa, Société Générale, State Street, and UBS.

3 The preparation of this discussion paper was facilitated by a PricewaterhouseCoopers operational risk and regulatory consulting specialist team lead by Andrew Gray and Sally Williams (www.pwcglobal.com).

4 PricewaterhouseCoopers refers to the member firms of the worldwide PricewaterhouseCoopers organisation.