Unlike market and credit risk, "operational risk" is a wide-ranging and inherently difficult class of risk to quantify and manage unambigously. Despite its significant impact on regulatory capital requirements, Basel II's definition points generically to "people, processes and systems" as the primary sources of operational risk in financial firms. In order to make visible headway in handling operational risk, financial firms rely predominantly on laborious and costly cataloguing of operational risk events - typically via a separately managed data warehouse.

forward look, inc's research into simple, cost-effective and information-rich methods for profiling operational risk results in a pragmatic and readily usable technique. Like a doctor who can gauge a patient's health by examining a blood sample, we enable a firm's management to monitor the health of their operation by analyzing (in real-time) the transactions it exchanges with its counterparties.

Transactions are the lifeblood of financial firms. They capture commitments to buy and sell, and the contingent expectations regarding risks and rewards based on the accumulated positions. Over time, transaction histories also provide an explicit window into the firm's cash flows and future earnings stream. In effect, transactions encapsulate sources of operational risk, and serve as a viable proxy into the quality of the systems supporting the firm's workflows, the processes underpinning those systems, and ultimately the people who built and maintain those processes and systems.

On average, over a third of cross-border securities transactions still fail at great cost to the counterparties involved. Significant gains in straight-through-processing (STP) have been delivered by business process re-engineering and systems automation spurred mainly by the harmonization of electronic messaging standards. However, securities firms still spend millions of dollars each year addressing operational risks highlighted by failed trades and the remediation required.

Our research into the anatomy of operational risk shows that these fails arise mainly from natural variances in what are already standards-compliant messages (eg, SWIFT ISO 15022) exchanged between the firm and its counterparties. These semantic and syntactic shortfalls between counterparties' systems and operations are driven by factors such as :

• competencies in systems implementations, eg reference data for "location codes".
• changing business workflows (eg, settlement of synthetic CDO's), and
• regulatory requirements (eg, MiFID, Dodd-Frank).

ContextMetrics™ profiles and tracks these natural variations in message quality, and enables the firm's managers to attain significantly higher levels of STP.