Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent "bad" trades having a detrimental effect on a desk overall. Another key Middle Office role is to ensure that the economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution).
This is a bank’s internal credit approval and monitoring function. It looks at how risky transactions are going to be, and whether they’re really worth that risk.
The Market Risk Management team assesses the effects of market movements and the associated risks on the trades and decisions the traders are making. These fall into four categories:
- Equity risk – that stock prices will change
- Interest rate risk – that interest rates will change
- Currency risk – that foreign exchange rates will change
- Commodity risk – that the price of a commodity will change