This section we look at governance framework
for financial risk management
and that is the learning objective we are looking at.
So, here we are talking about the FRM policy,
you can refer to this as a treasury policy as well
a very, very important policy that sets out
how to manage risks, treasury risks.
So it looks at how risks are measured.
So I don't know, if your organisation has a treasury team,
will be very, very important for you
to actually probably talk to someone in that department
and ask them if you don't work for that treasury team,
and ask them what is the FRM policy
or what is the treasury policy for our organisation?
And it should ideally outline how risks are measured
how risks are to be managed, so if it is interest rate risk,
its funding risk, if it's credit risk and the like.
It will also set the approval limits.
So the CFO what is the CFOs approval limit?
What is the CEOs approval limit?
What should the board approve?
It also sets the segregation of duties
So who can do what, who can approve certain payments
who can approve certain transactions?
Who can approve entering into a hedge arrangement
and the like and what is the responsibility
of which particular team members?
So that is set out in the policy.
It also sets out the approved borrowings
and investments and derivatives and hedging instruments.
So, you find the treasurer cannot just decide
to enter into a swap arrangement.
The question is does the FRM policy allow that?
Does the treasury policy allow that?
The treasury department cannot just decide
to enter into an option arrangement.
Is that allowed and to what limit and the like.
It also sets those performance measures
as well as reporting requirements.
So, how is the head of treasury remunerated?
How does the head of treasury know
whether they're hitting those goals or not?
So all those KPIs will also be included
or discussed in the FRM policy,
as well as how to report to the board,
or sometimes to the CFO and the CEO, and the like.
Now have a look at this.
Now in module one we talked about risks,
we talked about the FRM framework,
we talked about the risk management process
and so you should ideally be familiar
with these tables here.
So, you can see this is a likelihood table
and this is a consequence table.
And this is what generally
is the outcome of applying likelihood table
and a consequence table.
So for example here, you can see here
we are saying an event could be rare,
which means these are less than 5% percent chance
of occurring and for this organisation
so that's the likelihood table.
If it's unlikely it means it's 10 to 30% chance
of occurrence and you can see it's almost certain
you're saying is a 95% chance of occurrence.
Now, look at the consequence table
now this one really varies.
So for example all this amounts
will be insignificant potentially to a company like BHP.
But for this small entity, these are the amounts
that it is actually applying.
So the consequence table tends to really vary,
I'm talking about the thresholds,
depending on the size of the organisation.
Now, for this organisation,
greater than 1 million is considered to be catastrophic.
Now for a BHP a million would not be considered
to be catastrophic.
Now you can see, according to this organisation,
any amount less than 50,000 is considered
to be insignificant.
So you can see here they're saying for example
if the consequence is negligible
and the likelihood is rare
then that is considered to be a low risk.
And so sometimes you will find the board might say
or the risk committee might say,
we don't want to worry about that.
So many times you'll find the risk committee
will tend to worry about risks that sits around that.
Obviously even these ones as well, yeah.
Because they're high, medium and the like.
So you will find this law generally
the risk committee will not be worried about them.
They might want to be informed about them
but they will not worry about them.
Alright so these are practical risks of for these entities
so business continuity is a really major risk
that if an event occurs
the business will not continue to operate.
And so they're saying okay,
"What's the likelihood, wow it's likely okay"
"What will be the consequence
to the organisation severe"
That means we need to really prioritise this risk
because it's an extreme risk and if you look at this
that means it sits around that area there.
Now if you look at another one, safety of staff entering
and leaving the office due to poor lighting
we are saying the likelihood is likely
the consequences major so that needs to be prioritised
and again depends on the operations of this organisation.
All right now you can see from our dashboard point of view
sometimes you will find now I worked for Rio Tinto
and I worked for SEEK and I used to prepare
or review this type of reports
that would go to the Audit and Risk Committee.
And you'll find sometimes we would use dashboards
like this so you can see the blue colour there
is really representing the extreme risks
so you can see those are extreme risks.
Now, high risks are those risks there
and you can also see these are different categories.
So the legal department would probably be most worried
about that the finance team
and this is financial risk management,
we would probably be most worried about those risks.
Obviously the others are different types
of operational risk, the IT team would be very worried
about that the security team would be worried about that.