Goldman Sachs 2004 Annual Report Download - page 57

GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 5 5
management’s฀discussion฀and฀analysis
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 5 5
Regulated Subsidiaries
Many of our principal subsidiaries are subject to extensive regu-
lation in the United States and elsewhere. Goldman, Sachs & Co.
and Goldman Sachs Execution & Clearing, L.P.(1) are registered
U.S. broker-dealers and futures commissions merchants,
and their primary regulators include the Securities and
Exchange Commission (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
registered U.K. broker-dealer, is subject to regulation primarily
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 Financial
Supervisory Authority (BaFin) and the Bundesbank in
Germany, the Autorité des Marchés Financiers and Banque de
France in France, Banca d’Italia and the Commissione
Nazionale per le Società e la Borsa (CONSOB) in Italy, 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 state-
ments for further information regarding our regulated subsid-
iaries. For a discussion of our potential inability to access
funds from our regulated entities, see “—Risk Management—
Liquidity Risk—Intercompany Funding” included below.
The Financial Groups Directive (Directive 2002/87/EC of the
European Parliament and of the Council) introduced certain
changes to the way in which financial conglomerates and other
financial services organizations operating in Europe will be
regulated, with the changes to be implemented by member
states for fiscal years beginning in 2005. These changes will
cause activities that are currently conducted in unregulated
entities to become subject to certain forms of regulation,
including consolidated supervision and capital adequacy
requirements. Our efforts to comply with the directive involve
applying to be subject to the consolidated supervised entity
rules described below.
The SEC has adopted rule amendments that establish alternative
net capital requirements for broker-dealers that are part of a
consolidated supervised entity. As a condition to its use of the
alternative method, a broker-dealer’s ultimate holding company
and affiliates (referred to collectively as a consolidated supervised
entity or CSE) must consent to group-wide supervision and
examination by the SEC. Goldman, Sachs & Co. anticipates
applying for permission to use this alternative method.
We expect that doing so will enable us to comply with the
requirements of the Financial Groups Directive described
above. On becoming subject to the SEC’s group-wide supervi-
sion, Goldman Sachs will be required to report to the SEC
computations of our capital adequacy.
Risk Management
Management believes that effective risk management is of pri-
mary 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 conduct-
ing 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 complementary financial,
credit, operational and legal reporting systems. In addition, a
number of committees are responsible for monitoring risk expo-
sures and for general oversight of our risk management process.
These committees, whose responsibilities are described below,
meet regularly and consist of senior members of both our reve-
nue-producing units and departments that are independent of
our revenue-producing units.
manag e me nt฀ commit t e e ฀–฀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, trading risk parameters
and customer review guidelines.
risk฀ comm i t t ees฀– ฀The Firmwide Risk Committee reviews
the activities of existing businesses, approves new businesses
and products, approves firmwide and divisional 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)
and scenario analyses. In our asset management business, the
Control Oversight Committee, the Investment Policy Group
and the Valuation Committee oversee various operational,
credit, valuation and business practice issues.
(1)฀฀Group฀Inc.฀renamed฀Spear,฀Leeds฀&฀Kellogg,฀L.P.,฀Goldman฀Sachs฀Execution฀
&฀Clearing,฀L.P.,฀effective฀January฀14,฀2005.฀
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀15฀•฀Proof฀9฀•฀2/4/05฀•฀0700