Goldman Sachs 2003 Annual Report Download - page 57

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Management’s Discussion and Analysis
GOLDMAN SACHS 2003 ANNUAL REPORT 55
capital committee – The Capital Committee reviews
and approves transactions involving commitments of our
capital. Such capital commitments include extensions of
credit, alternative liquidity commitments, certain bond
underwritings, certain distressed debt and principal
finance activities, and certain equity block trades. The
Capital Committee is also responsible for ensuring that
business and reputational standards for capital commit-
ments are maintained on a global basis.
commitments committee – The Commitments Com-
mittee reviews and approves underwriting and distribu-
tion activities and sets and maintains policies and
procedures designed to ensure that legal, reputational,
regulatory and business standards are maintained in con-
junction with these activities. In addition to reviewing
specific transactions, the Commitments Committee peri-
odically conducts strategic reviews of industry sectors
and products and establishes policies in connection with
transaction practices.
credit policy committee – The Credit Policy Committee
establishes and reviews broad credit policies and parame-
ters that are implemented by the Credit Department.
business practices committee – The Business Practices
Committee assists management in its oversight of our
compliance and operational risk and related reputational
issues, and ensures that policies and practices are imple-
mented in accordance with our business principles.
structured products review committee – The
Structured Products Committee reviews and approves
structured transactions that raise legal, regulatory, tax or
accounting issues, or present other reputational risks.
operational risk committee – The Operational Risk
Committee provides oversight of the ongoing develop-
ment and implementation of our operational risk poli-
cies, framework and methodologies, and monitors the
effectiveness of operational risk management.
finance committee – The Finance Committee estab-
lishes and assures compliance with our liquidity policies,
sets certain inventory position limits and has oversight
responsibility for liquidity risk, the size and composition
of our balance sheet, our capital base and our credit rat-
ings. The committee regularly reviews our funding posi-
tion and capitalization and makes adjustments in light of
current events, risks and exposures.
Segregation of duties and management oversight are fun-
damental elements of our risk management process. In
addition to the committees described above, divisions
that are independent of the revenue-producing units, such
as Compliance, Finance, Legal, Management Controls
(Internal Audit) and Operations, in part perform risk
management functions, which include monitoring, ana-
lyzing and evaluating risk.
Business unit risk limits are established by the various
risk committees and may be further allocated by the busi-
ness unit managers to individual trading desks. Trading
desk managers have the first line of responsibility for
managing risk within prescribed limits. These managers
have in-depth knowledge of the primary sources of risk in
their individual markets and the instruments available to
hedge our exposures.
Market risk limits are monitored on a daily basis by the
Finance Division, and are reviewed regularly by the
appropriate risk committee. Limit violations are reported
to the appropriate risk committee and the appropriate
business unit managers. Selected business unit inventory
position limits are also monitored by the Finance
Division and position limit violations are reported to the
appropriate business unit managers, the Finance
Committee and the appropriate risk committee.
Market Risk
The potential for changes in the market value of our trad-
ing and investing positions is referred to as “market
risk.” Such positions result from underwriting, market-
making, specialist and proprietary trading and investing
activities.
Categories of market risk include exposures to interest
rates, equity prices, currency rates and commodity
prices. A description of each market risk category is set
forth below:
•Commodity price risks result from exposures to
changes in spot prices, forward prices and volatil-
ities of commodities, such as electricity, natural
gas, crude oil, petroleum products, and precious
and base metals.
•Interest rate risks primarily result from exposures
to changes in the level, slope and curvature of the
yield curve, the volatility of interest rates, mort-
gage prepayment speeds and credit spreads.
•Currency rate risks result from exposures to changes
in spot prices, forward prices and volatilities of cur-
rency rates.
•Equity price risks result from exposures to changes
in prices and volatilities of individual equities,
equity baskets and equity indices.