Man Group plc - Annual Report 2007

Introduction
Risk is inherent in the Group’s business and activities. Our ability to identify, assess, monitor and manage each type of risk to which the Group is exposed is an important factor in our financial soundness, performance, reputation and future success.

The sections below describe our approach to risk management. The first section is applicable to all risks and covers the Group’s risk governance structure, risk management process and its risk appetite. The second section explains the way in which Man categorises risks and principal factors that drive each type of risk faced by the Group and the measurement and processes for mitigation of these risks. The final section discusses future developments in risk management.

There are seven key elements in the Group’s risk management process:

Risk governance

• Setting risk policies, delegated authorities and limits consistent with the risk strategy.
• Establishing clear functional responsibilities, reporting lines and committee structures for the management of risk.
• Ensuring appropriate skills and resources are applied to risk management.

Risk strategy and appetite

• Setting the overall direction and objectives for risk management.

Risk infrastructure

• Establishing and continually refining the necessary infrastructure to support the risk management process including systems, data, tools, management information and external disclosure.

Risk identification

• Assessing the potential impact on the Group of internal and external factors that might give rise to a direct or indirect loss or demand for liquidity.

Risk measurement

• Using a range of methodologies including economic capital, value-at-risk, risk of worst loss, stress testing, scenario analysis and qualitative assessment and judgement to assess the potential impact and likelihood of the identified risks arising on both an independent and aggregate basis.

Risk monitoring and reporting

• Monitoring and reporting on the Group’s risk profile against its risk appetite, exposures against limits, losses and other risk related incidents, compliance issues and the effectiveness of the Group’s internal controls.

Risk mitigation

• Taking informed decisions on the nature and extent of risk to retain and on the appropriate internal control environment needed to manage risk.

Risk governance
Responsibility for the overall framework of risk governance and management lies with the Board. The Board is responsible for determining risk strategy, setting the Group’s risk appetite and ensuring that risk is monitored and controlled effectively. It is also responsible for establishing a clearly defined risk management structure with distinct roles and responsibilities.

Within that structure business managers are accountable for all the risks assumed within their areas of responsibility and for the execution of appropriate risk management discipline within the framework of policy and delegated authority set out by the Board. The principle of individual accountability and responsibility within a disciplined approach to risk management is an important feature of our culture.

Independent and objective assessment and monitoring of risk is provided by various risk control functions at Group level and within Asset Management and Brokerage. These risk control functions include the Group Risk department, risk management professionals embedded within each business, Legal and Compliance departments in each business, Group Corporate Responsibility and Internal Audit. Close attention is paid to the formal segregation of duties within business units and there are independent reporting lines for the key risk, compliance and finance functions. In addition, the processes which turn a risk decision into a concluded transaction – verification, confirmation, reconciliation, valuation, payment and settlement are carried out by functions that are distinct from those which make the risk decision. The key responsibilities of core functions in this regard are explained in more detail in the sections that follow.

In addition to individual responsibilities for risk management there is a structure of committees that, under authority delegated from the Board, have formal responsibility for and powers in relation to defined aspects of risk management. These are illustrated in the chart, which also shows their key responsibilities in relation to risks faced by Man.

Risk appetite
Risk appetite is the amount and type of risk that the Group regards as appropriate for it to accept in order to fulfil its business objectives. The Board regularly reviews and sets this in the form of nine risk appetite statements, which it sets in the context of the Group’s capacity to bear risk and the requirements of various stakeholders, including those constraints set by the regulatory framework.

The risk appetite statements, which are summarised below, provide the benchmark against which the Group’s risk profile is reported to the Board, Audit and Risk Committee (ARCom) and Group Risk Committee (GRC). Risk appetite also forms the basis for the calibration and setting of the delegated authorities and financial limits for all aspects of market, credit and liquidity risk.

The Group’s nine risk appetite statements address both quantitative and qualitative aspects of risk taking. Although measurement of risk is essential, it is impossible to quantify some risks with any accuracy and numbers alone cannot show all aspects of risk. Qualitative judgements, therefore, are also a critical component of the Group’s risk appetite and related monitoring and control processes.

The quantitative risk appetite statements address:

• maximum tolerance for unexpected loss (economic capital at 95% confidence level);
• minimum credit rating, measured by minimum capital surplus over economic capital required at 99.9% confidence level;
• minimum regulatory capital surplus;
• earnings volatility tolerance; and
• ability of the Group to meet peak stressed liquidity requirements without recourse to anything other than committed financing facilities or free cash balances to a confidence level of 99%.

View ‘Risk governance structure’ chart

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