Goldman Sachs 2004 Annual Report Download - page 58

management’s฀discussion฀and฀analysis
56฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
56฀฀฀G O L D M A N ฀ S A C H S ฀ 2 004฀ A N N U A L ฀ R E P O RT
business ฀ p r acti c e s ฀ committe e ฀–฀The Business Practices
Committee assists senior management in its oversight of compliance
and operational risks and related reputational concerns. The
committee also reviews the firm’s policies, practices and proce-
dures for consistency with our business principles. The commit-
tee makes recommendations for improvements in these areas so
as to mitigate potential risks and to assist in enhancing adher-
ence to our business principles.
c a p i t a l ฀ c o m m i t t e e ฀– ฀The Capital Committee reviews
and approves transactions involving commitments of our
capital. Such capital commitments include extensions of
credit, alternative liquidity commitments, certain bond under-
writings, certain distressed debt and principal finance activi-
ties and certain equity-linked structured products. The Capital
Committee is also responsible for ensuring that business and
reputational standards for capital commitments are main-
tained on a global basis.
commitme n t s ฀commit t e e ฀–฀The Commitments Committee
reviews and approves underwriting and distribution activities
and sets and maintains policies and procedures designed to
ensure that legal, reputational, regulatory and business stan-
dards are maintained in conjunction with these activities. In
addition to reviewing specific transactions, the Commitments
Committee periodically conducts strategic reviews of industry
sectors and products and establishes policies in connection with
transaction practices.
c re di t ฀ po li cy ฀ c om mi t te e฀– ฀The Credit Policy Committee
establishes and reviews broad credit policies and parameters
that are implemented by the Credit Department.
finance฀ c o m m ittee฀–฀The Finance Committee establishes
and ensures 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 ratings. The Finance Committee regu-
larly reviews our funding position and capitalization and makes
adjustments in light of current events, risks and exposures.
operat io nal฀ risk฀ c o m m ittee฀–฀The Operational Risk
Committee provides oversight of the ongoing development and
implementation of our operational risk policies, framework and
methodologies, and monitors the effectiveness of operational
risk management.
st ru c t u r e d ฀ pro du c ts ฀ co m m i t t ee ฀–฀The Structured
Products Committee reviews and approves structured product
transactions with our clients that raise legal, regulatory, tax or
accounting issues or present reputational risk to Goldman Sachs.
Segregation of duties and management oversight are fundamen-
tal elements of our risk management process. In addition to the
committees described above, departments 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, analyzing and evaluating risk.
Business unit risk limits are established by the various risk com-
mittees and may be further allocated by the business unit man-
agers to individual trading desks. Trading desk managers have
the first line of responsibility for managing risk within pre-
scribed limits. These managers have in-depth knowledge of the
primary sources of risk in their individual markets and the
instruments available to hedge their exposures.
Market risk limits are monitored on a daily basis by the Finance
Division, and are reviewed regularly by the appropriate risk com-
mittee. Limit violations are reported to the appropriate risk com-
mittee 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 and the Finance Committee.
MARKET฀RISK
The potential for changes in the market value of our trading and
investing positions is referred to as market risk. Such positions
result from market-making, specialist and proprietary trading,
investing and underwriting activities.
Categories of market risk include exposures to interest rates,
equity prices, currency rates and commodity prices. A descrip-
tion of each market risk category is set forth below:
• Interest rate risks primarily result from exposures to
changes in the level, slope and curvature of the yield curve,
the volatility of interest rates, mortgage prepayment speeds
and credit spreads.
• Equity price risks result from exposures to changes in
prices and volatilities of individual equities, equity baskets
and equity indices.
• Currency rate risks result from exposures to changes in spot
prices, forward prices and volatilities of currency rates.
• Commodity price risks result from exposures to changes in
spot prices, forward prices and volatilities of commodities,
such as electricity, natural gas, crude oil, petroleum prod-
ucts, and precious and base metals.
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