Operational Risk

For a corporate treasury, operational risk is the potential for loss resulting from inadequate or failed internal processes, people, systems, or external events that disrupt financial operations. It is the risk of things going wrong in the execution of daily treasury tasks: payments failing, fraud occurring, data being corrupted, or critical systems going offline. Unlike market or credit risk, it is not about taking a financial position but about the reliability of the treasury function itself.

Why Treasury is a Key Focus for Operational Risk

Treasury is a high-impact area for operational risk because it manages the company’s cash, executes financial transactions, and maintains sensitive banking relationships. A single failure here can lead to immediate financial loss, regulatory penalties, reputational damage, and a breakdown in business operations.

Key Operational Risk Areas in Treasury

Managing Treasury Operational Risk: A Control Framework

An effective approach is structured around the “Three Lines of Defence” model:

1. First Line – Treasury Management: Owns and manages risk daily.

   • Action: Implement strong internal controls: segregation of duties (initiator/approver/confirmer), payment verification protocols (call-backs, multi-factor authentication), reconciliation procedures, and clear documented policies for all key activities.

2. Second Line – Risk & Compliance Oversight: Monitors and challenges the first line.

   • Action: Establish a treasury policy approved by the Board. Conduct regular independent audits of treasury processes. Ensure compliance with financial regulations and internal limits.

3. Third Line – Internal Audit: Provides independent assurance.

   • Action: Perform periodic, in-depth audits of the entire treasury control environment and report findings directly to the audit committee.

The Role of Technology and Data

Modern treasury relies on technology not just for efficiency but as a primary risk mitigant:

• Treasury Management Systems (TMS) automate controls, enforce approval workflows, and create a clear audit trail.

• Bank API connectivity and SWIFT provide secure, standardised channels for transaction communication, reducing manual file handling.

• Robotic Process Automation (RPA) can be used for high-volume, rule-based tasks like reconciliations, removing human error.

In summary, managing operational risk is foundational for treasury. It is about building a control environment—through people, processes, and technology—that ensures the accurate, secure, and reliable movement of the company’s financial resources. A robust framework protects assets, ensures business continuity, and provides the foundation for all other strategic treasury activities.