Capital receipts and payments of the Petroleum Fund
Petroleum Fund of Timor-Leste Notes to the financial statements
for the year ended 31 December 2013
12 Financial risk and management objectives and policiescontinued
a Operational risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the processes, technology and infrastructure supporting the Petroleum Fund’s activities with financial instruments either internally within the entities that manage the
Petroleum Fund or externally with the Petroleum Fund’s service providers, and from external factors other than credit, market and liquidity risks, such as those arising from legal and regulatory requirements and generally accepted standards of investment management behaviour.
The Banco Central de Timor-Leste, as the operational manager of the Petroleum Fund, manages the operational risks associated with the operations of the Petroleum Fund. Operational risk management includes policies that describe the standard of conduct required of staff, and
specific internal control systems designed around the particular characteristics of the Petroleum Fund. Operational risk management is built into the policies and procedures of the Petroleum Fund Management Department, including periodically identifying and monitoring
operational risks at the Banco Central de Timor-Leste, the external managers, the global custodian and other key service providers.
The overall standards for the management of operational risk include the following: •
Requirements for appropriate segregation of duties between various functions, roles and responsibilities. •
Requirements for the monitoring of transactions •
Compliance with regulatory and other legal requirements •
Documentation of controls and procedures •
Requirements for the periodic assessment of operational risk faced •
Ethical and business standards The Banco Central de Timor-Leste’s assessment over the adequacy of the controls and processes in place at the external managers and other
service providers with respect to operational risk is carried out via ad hoc discussions with service providers and a review of the service providers’ ISAE16 reports on internal controls, if available.
Compliance with policies and departmental internal control systems is managed by an internal audit function, and there is specific provision in the daily management reports prepared by the Risk Management Division for the reporting of all issues that arise in connection with
operational matters. The purpose of this section of the reports is to notify senior management promptly of unexpected operational issues, and provide senior management with the opportunity to provide advice or take remedial action.
J.P. Morgan was appointed custodian of the Petroleum Fund in June 2008. As part of the custodial agreement their responsibilities include holding the Petroleum Funds assets. Substantially all the assets of the Petroleum Fund are held by J.P. Morgan. Bankruptcy or insolvency of
the Petroleum Fund’s custodian may cause the Fund’s rights with respect to the securities held by the custodian to be delayed or limited. Banco Central de Timor-Leste monitors the credit ratings and capital adequacy of its custodian and reviews custodial performance against the
measures in a service level agreement on a quarterly basis.
Specific due diligence on operational risk is also undertaken as part of the external manager appointment process, and ISAE16 reports are obtained from external managers that evidence the ongoing effectiveness of their internal control systems.
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Petroleum Fund of Timor-Leste Notes to the financial statements
for the year ended 31 December 2013