Core Focus: The internal governance structure of reserve management, including the decision-making hierarchy, the separation of front, middle, and back office functions, and the role of internal audit.

In-Depth Notes:
The internal governance structure of the reserve management entity is the operational framework through which accountability and integrity are maintained. The internal governance structure should be guided by and reflect the principles of clear allocation and separation of responsibilities and accountabilities . A well-defined organizational structure from the very top to operational levels of the reserve management entity requires a clear definition of the goals and a clear separation of responsibilities and accountabilities for their attainment at the various levels .

The Decision-Making Hierarchy:
The governance structure should have appropriate hierarchical levels with clear rules for delegation of authority, often complemented by a committee structure aimed at facilitating efficient decision making and oversight . The decision-making hierarchy is aimed at ensuring the integrity of reserve management operations, facilitating effective decision making, and maintaining control over reserve management activities .

Top-Level Strategic Decisions:
At the very top level, the governing board or similar body makes decisions of a strategic nature and exerts overall oversight. The strategic decisions typically comprise preferences with regard to the trade-off between risks and returns and the broad composition of assets under management. In addition, the top hierarchical level establishes the framework for implementation of the reserve management strategy .

The Investment Committee:
Decisions concerning the implementation of strategies are usually delegated to an investment committee. The committee is usually responsible for detailing the operational framework for reserve management activities, including the investment strategy implementation and portfolio benchmarks, and for reviewing operations and performance on a regular basis. The committee typically also has a responsibility for approving the inclusion of new specific types of investment operations and instruments within the criteria set by the top-level decision maker .

The Separation of Investment and Risk Control:
The investment management and risk control activities should be adequately separated. This separation facilitates an independent and comprehensive identification, monitoring, and management of risks . At the operational level, decision making and responsibility for day-to-day reserve management operations are usually separated between the investment and risk control functions .

The Front, Middle, and Back Office:
The investment function refers to the entire spectrum of reserve management activities. This includes those who initiate reserve management transactions (front office); those who control and ensure that risk limits are observed, assess performance, and provide reports for management (middle office); those who arrange settlement of transactions (back office); and those who maintain the financial accounting records that form the basis of public disclosures (accounting department) .

Internal Audit:
An independent internal audit should regularly assess procedures and controls with regard to consistency and compliance with the institution’s policies, and formulate proposals to the Board or top management for improving the governance and organizational structure . Effective monitoring of internal operations and related risks should be supported by reliable information and reporting systems, and an independent audit function .

Staff Integrity and Business Continuity:
Reserve management activities require appropriately qualified and well-trained staff . Staff should be subject to a code of conduct and conflict of interest guidelines regarding the management of their personal affairs . Business continuity policies, including effective recovery procedures, should be in place to mitigate the risk that reserve management activities might be severely disrupted by the failure of operating systems, or other catastrophic events .