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  • Risk governance

    Chapter 3 - Cotton marketing - Risk management – A cotton supply chain manager’s perspective

     
     

    Governance structure

    An ideal risk governance structure is characterized by independent external assurance as well as internal management assurance as shown in figure 3.7.

    3.6.9.3-en1 

    Figure 3.7: Governance structure

    External assurance

    The board level risk committee should be the apex body for risk management. An external director should head this committee. The committee should be responsible for setting direction for market risks (outright, basis and currency), and credit and counterparty risks.

    The board audit committee should also be headed by an independent director. This committee should oversee the operational risks associated with the company. The board risk committee and board audit committee should have members in common to prevent any gaps in governance process.

    The external auditors should do an annual audit of the risk management processes of the company and ascertain the sufficiency of risk management practices for the company’s level of operations.

    Internal assurance

    The executive level risk committee should be the apex management body for risk management in the company. This committee is responsible for driving risk management policies and procedures across the company for price risks (outright, basis and currency), and for credit and counterparty risks. The risk office should be represented in the executive level risk committee.

    The internal audit team should be responsible for auditing the operational risks of the company, including the operational risk in implementing risk management processes.

    Segregation of duties

    The risk control process should be demarcated into front office, risk middle office and back office for all transactions, particularly those pertaining to futures and options. This is to ensure that:

    • All trades are recorded in the company systems;
    • Brokers’ P/L and M2M are calculated independently;
    • Traders are not able to make margin settlement directly.

     3.6.9.3-en2 

     

    The front office, consisting of product teams, should enter all futures and options transactions within 12 workings hours of the transaction. The risk middle office should reconcile these trades with the daily broker recaps within one or two days of the transactions. Based on the reconciliation, risk middle office can calculate broker margin requirements, and send the margin settlement details to back office daily for the concerned brokers.

    The back office (treasury) makes final payment to the brokers based on the instruction from risk middle office.

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    Cotton Exporter's Guide

    Brochure - African cotton promotion
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