## Risk Management Report 

continued 

## Macquarie’s risk culture is well established 

Macquarie recognises that an effective risk management framework involves more than just robust controls. Macquarie's risk culture, which is less tangible, is equally as important and at Macquarie the risk culture remains strong and controls are respected by staff. Risk culture is established and maintained in the organisation broadly through three steps: 

Setting expectations -  The Board sets expectations regarding appropriate behaviours and oversees performance. 

Leading and executing -  Management implement these expectations by their leadership actions and communication, organisational governance, incentives and consequences as well as establishing appropriate capability. 

Monitoring and measuring -  Effectiveness is assessed and reported to allow adjustment and refinement as necessary. 

Key aspects supporting Macquarie's risk culture include: 

GLYPH<150> Macquarie's businesses are fundamentally client based . Therefore, across Macquarie, greater emphasis is placed on fostering long-term relationships with our clients and building franchise businesses as opposed to short-term profits from proprietary trading 

GLYPH<150> Consideration of worst-case scenarios is part of everyday risk controls rather than supplementary to them . Even though the worst case scenarios are often in excess of what has been historically observed, they play a major role in influencing and limiting positions particularly for extreme loss events. For example, we apply limits to contingent losses from an instantaneous 40 per cent gap move in stock prices. This effectively constrains trading divisions from issuing well out of the money options and encourages hedging of extreme loss events. We have over 14,000 contingent loss limits that consider a variety of worst case scenarios 

GLYPH<150> The role of risk management staff is one of active engagement in risk-taking decisions . In accordance with the principle of risk ownership, the primary risk analysis and initial decisions to reject or accept a transaction are taken by Operating Groups. In its review of a new proposal, RMG provides an independent confirmation of the risk acceptance decision. RMG works closely with the deal team and shares the goal of making the transaction successful by requiring improvements to the transaction terms where applicable. Strong emphasis is placed on transferring knowledge to transaction teams so that the same risk management principles are applied to future proposals from an early stage 

GLYPH<150> Macquarie’s remuneration policy for senior management encourages a long-term view in decision making . It discourages excessive risk taking as incentives are aligned with the long-term profitability of the firm through retention of remuneration and equity participation. The principles behind our current remuneration structure have been in place for many years. 

## Risk governance structure 

Risk management is sponsored by the Macquarie Group Board (Board), and is a top priority for senior managers, starting with the Managing Director and CEO (CEO). 

The Head of RMG, as Macquarie’s Chief Risk Officer (CRO), is a member of Macquarie’s Executive Committee and reports directly to the CEO. The CRO has a secondary reporting line to the Board Risk Committee that approves the replacement, appointment, reassignment or dismissal of the CRO. 

The Board oversees the risk appetite and profile of Macquarie and ensures that business developments are consistent with the risk appetite and goals of Macquarie. 

All Board members are members of the Board Risk 

Committee. The Board Risk Committee reviews and endorses Macquarie's risk management framework which includes the establishment of policies for the control of risk. 

The Board Risk Committee receives information on the risk profile of Macquarie, breaches of the policy framework and external developments that may have some impact on the effectiveness of the risk management framework. It also approves significant changes to risk management policies and framework and approves Macquarie’s risk appetite. The Board Risk Committee is assisted by the following Committees: 

GLYPH<150> The Board Audit Committee (BAC) monitors the effectiveness of internal controls with Macquarie’s management, the Head of Internal Audit and the external auditor. The BAC also monitors and reviews the effectiveness of the external auditors and the Internal Audit and Credit Assurance functions 

GLYPH<150> The Board Remuneration Committee liaises with the Board Risk Committee and the CRO to ensure there is a properly integrated approach to remuneration that appropriately reflects risk 

GLYPH<150> The Board Governance and Compliance Committee (BGCC) reviews Macquarie’s corporate governance arrangements and compliance matters. The BGCC also has oversight of Work Health and Safety and environmental matters on behalf of the Board. 

Committees exist at the executive management level to ensure that the necessary elements of expertise are focused on specific risk areas. The Macquarie and Macquarie Bank Executive Committees and the Macquarie Operations Review Committee focus on strategic issues, operational issues, material transactions and the management of risk and review the performance of Macquarie on a monthly basis. Beneath this level, there are other committees where senior specialists focus on specific risks as appropriate. The Market Risk Committee and Asset and Liability Committee are examples of these committees. 

While committees oversee Macquarie’s risk appetite and acceptance process, risk acceptance decisions are ultimately delegated to individuals to ensure that approvers are individually accountable when signing off on risk acceptance decisions. 

