Operational Risks: It arises from human & technical errors or accidents. This includes fraud, management failure and inadequate procedures & controls. Technical errors may be due to breakdowns in information, transaction processing, and settlement systems or any other problem in back office operations, which deals with the recording of transactions and reconsolidation of individual trades with the firms aggregate position.
It can also lead to market & credit risk, like if the settlements fail than it will create market risk & credit risk, since the cost may depend on movements in the market price.
The best protection against operational risks consists of redundancies of systems, clear separation of responsibilities with strong internal control and regular contingency planning.
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