Systemic Operational Risk
First published:
ISBN: 9781782722182
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Systemic Technology Risks
Systemic Technology Risks
Introduction
Operational Risk: Basel II Regulation
New Models of Systemic Risk
Systemic Operational Risk – Extreme Operational Losses
Universal Banking, Universal Cultures
Macro-Cultures
Innovation and Complexity
A Seismic Model of Systemic Operational Risk
Systemic People Risks: Product Mis-selling
Market Manipulation
Legal Risks
Systemic Technology Risks
Regulation of Systemic Risk
Macroprudential Regulation
Microprudential Regulation
Overview
Part II of the book concludes with an exploration of systemic technology risks: the risks posed by financial institutions seeking to gain a competitive advantage through their use of technology. The chapter will be different in that there is only one case study, for HFT, also called flash trading.
The chapter is included here because it deals with emerging systemic operational risks driven by technology innovation (see Chapter 6). To date, the operational risk losses attributable to such cases are relatively small, but many of the opportunities for misconduct that were thrown up in mis-selling, manipulation and legal cases are also visible in these emerging technology risks. The chapter concludes by discussing the concept of “dark pools”, and by offering a general overview of emerging technology risks that may incur operational risk losses in the future. This is an important topic. A wide-ranging study of the “Future of Computer Trading in Financial Markets”, by the Government Office for Science (GOS) in 2012, argued that:
Rapid developments and applications of new technology, coupled with ever-increasing complexity of financial trading and markets make it difficult to
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