Goldman Sachs 2002 Annual Report Download - page 48

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
Securities and Exchange Commission, the Commodity
Futures Trading Commission, the Chicago Board of
Trade, the New York Stock Exchange and The National
Association of Securities Dealers, Inc. Goldman Sachs
International, a registered U.K. broker-dealer, is subject to
regulation by The Financial Services Authority. Goldman
Sachs (Japan) Ltd., a Tokyo-based broker-dealer, is sub-
ject 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 Financial
Supervisory Authority (BaFin) and the Bundesbank in
Germany, the Securities and Futures Commission in
Hong Kong and the Monetary Authority of Singapore.
Compliance with the rules of these regulators may pre-
vent us from receiving distributions, advances or repay-
ment of liabilities from these subsidiaries. See Note 14 to
the consolidated financial statements for further informa-
tion regarding our regulated subsidiaries.
RISK MANAGEMENT
Goldman Sachs has a comprehensive risk management
process to monitor, evaluate and manage the principal
risks assumed in conducting its activities. These risks
include market, credit, liquidity, legal, reputational and
other operational 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 sys-
tems. We believe that we have effective procedures for
evaluating and managing the market, credit and other
risks to which we are exposed. Nonetheless, the effec-
tiveness of our policies and procedures for managing risk
exposure can never be completely or accurately predicted
or fully assured. For example, unexpectedly large or
rapid movements or disruptions in one or more markets
or other unforeseen developments can have a material
adverse effect on our results of operations and financial
condition. The consequences of these developments can
include losses due to adverse changes in inventory values,
decreases in the liquidity of trading positions, higher
volatility in our earnings, increases in our credit exposure
to customers and counterparties, an inability to engage in
new transactions and increases in general systemic risk.
Goldman Sachs has established risk control procedures at
several levels throughout the organization. Trading desk
managers have the first line of responsibility for manag-
ing 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.
In addition, a number of committees are responsible for
establishing trading limits, for monitoring adherence to
these limits and for general oversight of our risk manage-
ment process. These committees, whose responsibilities
as of 2003 are described below, meet regularly and con-
sist of senior members of both our revenue-producing
units and departments that are independent of our
revenue-producing units.
M AN A G E M E N T C O M M I T T E E –All risk control functions
ultimately report to the Management Committee.
Through both direct and delegated authority, the
Management Committee approves all of Goldman Sachs’
operating activities, trading risk parameters and customer
review guidelines.
R I S K C O M M I T T E E S –The Firmwide Risk Committee:
•reviews the activities of existing businesses;
•approves new businesses and products;
•approves divisional market risk limits and reviews
business unit market risk limits;
•approves inventory position limits for selected
country exposures and business units;
•approves sovereign credit risk limits and credit risk
limits by ratings group; and
•reviews scenario analyses and approves limits based
on abnormal or “catastrophic” market movements.
The FICC and Equities Risk Committees set market risk
limits for their respective product lines based on a num-
ber of measures including Value at Risk (VaR), scenario
analyses and inventory levels. The Asset Management
Control Oversight and the Asset Management Risk
Committees oversee various operational, credit, pricing
and business practice issues.
G L O B A L C O M P L I A N C E A N D C O N T R O L C O M M I T T E E –The
Global Compliance and Control Committee assists man-
agement in the identification and review of certain com-
pliance, reputational and other operational risks and in
the development of policies and communication and
training programs designed to mitigate these risks.
Managem ent’s D iscussion and A nalysis
46 G O L D M A N SA CH S 2002 AN N UA L R EPO RT