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ORX Summary on CEBS Consultative Paper 21

Core Content

The letter from the Operational Riskdata eXchange Association (ORX) is a response to the CEBS Consultative Paper 21, which outlines supplementary guidelines on the implementation of operational risk. ORX, a Swiss-based not-for-profit organization with 52 members from 18 countries, provides detailed comments on Section C of the consultative paper, focusing on the scope of operational risk and operational risk loss. The comments reflect the collective views of ORX members and are not necessarily the views of individual firms.

ORX is supportive of CEBS's initiative to enhance understanding and consistency in operational risk categorization. They highlight that the issues raised by CEBS are largely aligned with those identified by ORX members, and only a small number of recommendations differ. ORX emphasizes the importance of principles-based approaches, avoiding double-counting of losses, and ensuring that guidelines reflect industry good practices.

Main Recommendations

1. A Principles-Based Approach

• ORX advocates for a principles-based approach to classification, starting with definitions and then applying principles.
• This is particularly important for complex and infrequent events, where small changes in detail can lead to different categorizations.
• The DWG (Definitions Working Group) has identified several such boundary issues between operational risk and other risk types (e.g., Market Risk, Credit Risk, Business/Strategic Risk).

2. Recognize Losses Only Once

• ORX recommends that losses should not be represented multiple times in capital calculations.
• This is especially relevant when operational risk events are also reflected in credit risk calculations.
• Examples include the Enron case and collateral documentation.

3. Guidelines Should Reflect Good Practice and Support Value

• ORX believes that guidelines should be practical and unambiguous to ensure utility for firms.
• They express concern that terms like "Near Misses", "Pending Losses", and "Timing Losses" may not be standard industry practices and may lead to inconsistencies.
• ORX suggests that CEBS should recommend internal policies for handling these terms, rather than imposing industry-wide practices.

Key Information

• ORX Members: 52 members from 18 countries.
• Data Collection: ORX members reported over 110,000 losses in February 2009, totaling €37 billion in operational risk losses.
• Data Scope: ORX supports the consistent categorization of operational risk losses, emphasizing the need for clarity and practicality.
• Revisions: ORX is planning to redraft and reissue its Operational Risk Reporting Standards, incorporating feedback from the DWG.
• DWG Role: The DWG regularly discusses categorization issues and aims to promote consistency across the industry.
• Timing Losses: ORX recommends that timing losses be excluded from the scope of operational risk losses due to their temporary nature and potential for double-counting.

Conclusion

ORX appreciates the opportunity to contribute to the development of consistent operational risk categorization standards and encourages CEBS to consider the principles-based approach, avoid double-counting, and align guidelines with industry practice. They also recommend that firms define their own internal policies for handling non-standard categories such as "Near Misses", "Pending Losses", and "Timing Losses".

This letter is a valuable input to the regulatory community, aiming to improve the quality, consistency, and practicality of operational risk data collection and reporting.