Goldman Sachs 2003 Annual Report Download - page 56

Management’s Discussion and Analysis
54 GOLDMAN SACHS 2003 ANNUAL REPORT
Our commitments to extend credit are agreements to lend
to counterparties that have fixed termination dates and
are contingent on all conditions to borrowing set forth in
the contract having been met. Since these commitments
may expire unused, the total commitment amount does
not necessarily reflect the actual future cash flow require-
ments. As of November 2003, $4.32 billion of our out-
standing commitments have been issued through the
William Street credit extension program. Substantially all
of the credit risk associated with these commitments has
been hedged through credit loss protection provided by
SMFG. We have also hedged the credit risk of certain
non-William Street commitments using a variety of other
financial instruments. See Note 6 to the consolidated
financial statements for further information regarding
our commitments, contingencies and guarantees.
As of November 2003, we had commitments to enter
into forward secured financing transactions, including
certain repurchase and resale agreements and secured
borrowing and lending arrangements, of $35.25 billion.
REGULATED SUBSIDIARIES
Many of our principal subsidiaries are subject to exten-
sive regulation in the United States and elsewhere.
Goldman, Sachs & Co. and Spear, Leeds & Kellogg, L.P.
are registered U.S. broker-dealers and futures commis-
sions merchants, and their primary regulators include the
SEC, the Commodity Futures Trading Commission, the
Chicago Board of Trade, the NYSE, the National
Association of Securities Dealers, Inc. and the National
Futures Association. Goldman Sachs International, a reg-
istered U.K. broker-dealer, is subject to regulation by the
Financial Services Authority. Goldman Sachs (Japan)
Ltd., a Tokyo-based broker-dealer, is subject to regulation
by the Financial Services Agency, the Tokyo Stock
Exchange, the Osaka Securities Exchange, The Tokyo
International Financial Futures Exchange and the Japan
Securities Dealers Association. Several other subsidiaries
of Goldman Sachs are regulated by securities, investment
advisory, banking, and other regulators and authorities
around the world, such as the Federal Securities Trading
Supervisory Authority (BaFin) and the Bundesbank in
Germany, the Autorité des Marchés Financiers and
Banque de France in France, the Commissione Nazionale
per le Società e la Borsa (CONSOB) in Italy and the Swiss
Federal Banking Commission, the Securities and Futures
Commission in Hong Kong and the Monetary Authority
of Singapore. See Note 14 to the consolidated financial
statements for further information regarding our
regulated subsidiaries. For a discussion of our potential
inability to access funds from our regulated entities, see
“— Risk Management —Liquidity Risk—Asset-Liability
Management Policies— Subsidiary Funding and Foreign
Exchange Policies.”
RISK MANAGEMENT
Management believes that effective risk management is of
primary importance to the success of Goldman Sachs.
Accordingly, we have a comprehensive risk management
process to monitor, evaluate and manage the principal
risks we assume in conducting our activities. These risks
include market, credit, liquidity, operational, legal and
reputational exposures.
Risk Management Structure
Goldman Sachs seeks to monitor and control its risk
exposure through a variety of separate but complemen-
tary financial, credit, operational and legal reporting
systems. In addition, a number of committees are
responsible for monitoring risk exposures and for general
oversight of our risk management process. These com-
mittees, whose responsibilities as of 2004 are described
below, meet regularly and consist of senior members of
both our revenue-producing units and departments that
are independent of our revenue-producing units.
management committee – All risk control functions ulti-
mately report to our Management Committee. Through
both direct and delegated authority, the Management
Committee approves all of our operating activities, trad-
ing risk parameters and customer review guidelines.
risk committees – The Firmwide Risk Committee
reviews the activities of existing businesses, approves new
businesses and products, approves firmwide and divi-
sional market risk limits, reviews business unit market
risk limits, approves market risk limits for selected
emerging markets and business units, approves sovereign
credit risk limits and credit risk limits by ratings group,
and reviews scenario analyses based on abnormal or
“catastrophic” market movements.
The Divisional Risk Committee sets market risk limits,
subject to overall firmwide risk limits, for both FICC and
Equities based on a number of measures, including Value-
at-Risk (VaR), scenario analyses and inventory levels. In
our asset management business, the Control Oversight
Committee, the Investment Policy Group and the
Valuation Committee oversee various operational, credit,
pricing and business practice issues.