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What are the most effective strategies for managing financial risks in an ERM program?

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Financial risks are the potential losses or uncertainties that arise from changes in market prices, interest rates, exchange rates, credit ratings, or liquidity. They can affect the performance, value, and reputation of any organization, especially those that operate in complex and dynamic environments. Therefore, managing financial risks is a crucial component of enterprise risk management (ERM), which is a holistic and strategic approach to identify, assess, and respond to all types of risks that affect an organization's objectives and capabilities.

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1 ERM Framework

An ERM framework is a set of principles, processes, and tools that guide an organization's risk management activities and culture. It helps to align risk appetite, strategy, and governance, as well as to integrate risk information across different functions, levels, and units. A well-designed ERM framework should be flexible, adaptable, and responsive to changing internal and external conditions, as well as to the specific needs and characteristics of the organization. Some of the widely used ERM frameworks include COSO, ISO 31000, and RIMS.

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2 Risk Identification

Risk identification is the process of finding and describing the sources, events, and consequences of financial risks that could affect an organization's objectives and operations. It involves collecting and analyzing relevant data, information, and insights from various sources, such as financial statements, market reports, industry trends, regulatory requirements, stakeholder feedback, and historical records. Risk identification should be done regularly, comprehensively, and systematically, as well as in response to any significant changes or incidents that may create new or emerging risks.

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3 Risk Assessment

Risk assessment is the process of measuring and evaluating the likelihood and impact of financial risks on an organization's objectives and performance. It involves applying quantitative and qualitative methods, such as scenario analysis, sensitivity analysis, stress testing, Monte Carlo simulation, and expert judgment, to estimate the probability, severity, and volatility of potential outcomes. Risk assessment should be done consistently, objectively, and transparently, as well as in alignment with the organization's risk appetite and tolerance levels.

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4 Risk Response

Risk response is the process of selecting and implementing the appropriate actions and strategies to manage financial risks in an effective and efficient manner. It involves choosing among four possible options: avoid, reduce, transfer, or accept. Avoid means eliminating or avoiding the risk source or exposure. Reduce means mitigating or controlling the risk likelihood or impact. Transfer means sharing or transferring the risk burden or responsibility to a third party, such as an insurer or a counterparty. Accept means retaining or accepting the risk exposure or consequence.

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Miitesh Haria

Independent Director / Board Advisory / Global Compliance / Risk Management / Corporate Governance / Trusteeship / Fiduciary / AML & KYC / Data Privacy / Regulatory Change Management / Setting-up New Business Venture
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Acceptance of a risk is a business decision. It is important to outline within the ERM Policy Framework who is entitled to take the decision and would be finally responsible. Ensure there is a process of reporting of risks which are accepted by the business to the Risk Committee and the Board (where necessary).

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5 Risk Monitoring

Risk monitoring is the process of tracking and reviewing the performance and effectiveness of the risk management activities and strategies. It involves collecting and reporting relevant risk indicators, metrics, and data, such as risk exposures, losses, incidents, events, controls, and responses. Risk monitoring should be done continuously, timely, and accurately, as well as in accordance with the organization's risk reporting and communication policies and standards.

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Miitesh Haria

Independent Director / Board Advisory / Global Compliance / Risk Management / Corporate Governance / Trusteeship / Fiduciary / AML & KYC / Data Privacy / Regulatory Change Management / Setting-up New Business Venture
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No doubt in many cases financial risk (eg. for investment/broking/finance companies) has to be monitored on real time basis. It is important that such monitoring is automated with built in triggers with hard limits (limits which cannot be breached). The triggers are set in the system with maker checker concept where the checker has to be an independent risk manager. On the other hand risk mitigation should also be time bound and system should be designed to generate exception reports.

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6 Risk Learning

Risk learning is the process of enhancing and improving the risk management capabilities and culture of the organization. It involves identifying and applying the lessons learned, best practices, and feedback from the risk management processes and outcomes. Risk learning should be done periodically, collaboratively, and constructively, as well as in support of the organization's risk innovation and development initiatives.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Miitesh Haria

Independent Director / Board Advisory / Global Compliance / Risk Management / Corporate Governance / Trusteeship / Fiduciary / AML & KYC / Data Privacy / Regulatory Change Management / Setting-up New Business Venture
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One of the way in managing financial risk where risk culture is not that effective despite efforts and there are frequent breaches, is to map all the breaches to the individuals responsible for the breach and the same is shared with that department head & HR at the time of appraisal. The message of this process, works like a top down approach and fixes the responsibility on the department head to ensure improvements. Such data can also be tabled at the risk committee to emphasise its importance and makes the head of department answerable.

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What are the most effective strategies for managing financial risks in an ERM program?

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1 ERM Framework

2 Risk Identification

3 Risk Assessment

4 Risk Response

5 Risk Monitoring

6 Risk Learning

7 Here’s what else to consider

Risk Management

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What are the most effective strategies for managing financial risks in an ERM program?

1

2

3

4

5

6

7

1 ERM Framework

2 Risk Identification

3 Risk Assessment

4 Risk Response

5 Risk Monitoring

6 Risk Learning

7 Here’s what else to consider

Risk Management

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