The company’s risk management system is like a smart home security system. It coordinates the operation of all devices, collects statistics of their operation, records the indicators, processes this information and then transmits the data to the server in order to analyze the general condition of the house and identify possible problems.
OTP Capital’s risk management system operates in a similar way. The main task of the system is to prevent the occurrence of adverse events that may adversely affect the company’s performance.
In the course of its activities, any company can face many risks. They can be divided into four main types: market risk, credit, operational and liquidity risk. The probability of their occurrence and the impact on the company’s activities are very different. Let’s consider each of them in more detail using our example.
The market risk for OTP Capital is that the value of the assets in which the company invests may change significantly at any time. Falling or rising, depending on the strategy of the fund, can significantly affect the performance of funds in both positive and negative directions. The task of risk management is to minimize possible losses by setting limits or even limit participation in potentially risky instruments.
Credit risk threatens the AMC primarily by non-repayment of the investment as a result of insolvency or bankruptcy of a counterparty. The task of our risk management is to study counterparties in detail, to establish their risk profile, as well as to give or not to give the green light for cooperation with them.
Liquidity risk is the situation when a company or fund in emergency situations is forced to urgently sell available assets at a price below the market one to meet its obligations. In order to avoid such situations, the risk management system of OTP Capital evaluates the feasibility of acquiring certain assets depending on the degree of their liquidity, purpose and strategy of the fund. For example, for pension funds, which are a long-term instrument, we can take instruments with a maturity of 3-5 years. However, for open-end investment funds, where clients can buy or sell investment certificates on a daily basis, such an investment will be risky, as it will have a high chance of losses.
Operational risks include all possible risks – from technical failures of the internal system or mechanical error of an employee to the surrounding circumstances. This year, almost all companies in the world faced the large-scale operational risk – the COVID-19 pandemic, which not only changed the operating conditions of most of them, but also became a serious threat to some businesses.
OTP Capital’s risk management system has several parts. The first one is structural and functional, headed by a risk manager, who is directly subordinated to the company’s Supervisory Board. In the course of performing his/her duties, the risk manager reports to the Risk Management Committee, which actually determines the strategic directions of the company’s activities in terms of risk management. The second, and at the same the time basic one, part of the risk management system is every employee of the company. The system itself is worthless without the strict adherence to the rules. Awareness, responsibility and strict compliance with the requirements of the risk management system by each participant in the process is the key to the success of the system and the company as a whole.
It should also be emphasized that OTP Capital’s activities are aimed at satisfying the investment interests of clients. Given the specifics of our activities, the risk management system is especially relevant to us. Every day, we perform continuous control of a large number of various indicators and limits. This allows us to stay relevant, minimizing or preventing risks that may affect the company’s activities, fund results and, consequently, the effectiveness of customer investment. The reaction to any deviations is immediate. After all, in our case, a successfully overcame risk is a risk that never happened. Moreover, we are working in this direction.
