This lesson addresses the management of extreme, unforeseen events and broader systemic risks.

6.1. Identifying and Managing ‘Black Swan’ Events

‘Black swan’ events are rare and unpredictable occurrences that can have severe consequences. The ACT practice paper explores how to manage such events, suggesting that the most appropriate method is “setting up robust and broad hedging strategies and policy” . This highlights the importance of a comprehensive, rather than a reactive, approach to risk management.

6.2. Diversification and Risk Mitigation

Diversification is a key tool for managing risk. The ACT practice paper identifies two specific actions that help to diversify risk: “having access to multiple funding sources” and “investing in different asset classes” . This reduces reliance on any single source of funds or type of investment.

6.3. Stress Testing and Scenario Analysis

To prepare for extreme events, treasuries use stress testing and scenario analysis. These techniques evaluate the potential impact of severe market movements or economic conditions on the organisation’s financial position . This provides critical insight into the organisation’s resilience and helps to inform risk appetite decisions.

6.4. Corporate Governance and Risk Oversight

Effective governance is essential for managing systemic risks. The board, audit committee, and risk committee each have distinct responsibilities for overseeing risk. For example, the audit committee’s responsibilities include “internal controls, external auditor independence and effectiveness of the audit function” .