macquarie.com.au  2014 Annual Financial Report  Macquarie Group Limited and its subsidiaries  Risk Management Report  continued  Funds transfer pricing Reputation risk Regulatory and compliance risk Internal Audit  Legal risk Basel III (1) Standard approach applied for specific risk on debt  securities.  GLYPH<150> the organisation may be found to be responsible for a  claim based on a breach of contract, law or regulation. GLYPH<150> business does not adequately understand the legal  and regulatory framework in which it operates  GLYPH<150> transactions are not capable of being enforced as  expected 36  These advanced approaches place a higher reliance on  a bank’s internal capital measures and therefore require  a more sophisticated level of risk management and risk  measurement practices.  Macquarie Bank is accredited under the Foundation Internal  Ratings Based Approach (FIRB) for credit risk, the Advanced  Measurement Approach (AMA) for operational risk, the  internal model approach for market risk$^{(1)}$ and the internal  model approach for interest rate risk in the banking book.  Legal risk is managed through identification and assessment  of legal risk, and by minimising or mitigating legal risk as far  as reasonably practical. Responsibility for legal risk lies with  Macquarie’s businesses in conjunction with Legal and  Governance. The Head of Legal and Governance, the  General Counsel, is a member of Macquarie’s Operations  Review Committee and reports directly to the CEO.  The General Counsel has access to the Board and any  Board committees. Each Macquarie Operating Group has  Legal risk includes the risk that: The RMG Compliance role is closely supported by RMG  Prudential, Capital & Markets (PCM) to ensure compliance  with prudential standards and consistency of Macquarie’s  approach to prudential regulation globally.  The Head of Internal Audit is jointly accountable to the  BAC and the CRO. The BAC approves the appointment and  removal of the Head of Internal Audit who has unlimited  access to the BAC.  Internal Audit provides independent assurance to  Management and the Board on the quality and effectiveness  of Macquarie’s internal control, risk management and  governance systems and processes. Internal Audit provides  an independent and objective assessment as to whether risks  have been adequately identified; adequate internal controls are  in place to manage those risks; and whether those controls  are working effectively. Internal Audit is independent of both  business management and the activities it reviews.  The Head of Compliance has free access to the BGCC at  any time and meets privately with the BGCC at least once a  year.  The Head of Compliance reports directly to the CRO.  The direct financial losses arising from reputation risk  (such as breach of mandates and regulatory fines) as well as  legal costs are taken into account in the operational risk  capital model.  The various policies, procedures and practices in place  aim to minimise reputation risk. Regular reporting to the  Operations Review Committee and Boards includes detail  on reputation risk issues as appropriate.  The Compliance Division communicates and delivers on its  priorities by defining and implementing a risk-based  compliance program that sets out planned activities, such as  the implementation and review of specific policies and  procedures, compliance testing and staff training. The  compliance program is overseen by the Global Head of  Compliance to ensure appropriate coverage across  businesses and co-ordination among other risk management  functions.  In line with the core risk management principle of risk  ownership, business heads are responsible for identifying  risks within their businesses and ensuring that they are  managed appropriately. The Compliance Division enables  business management to fulfil these supervisory  responsibilities by establishing a robust and effective  compliance framework, and by performing an advisory,  training and monitoring role in respect of the compliance  risks arising from Macquarie’s business activities. Operating Groups take ownership of risk, including  reputation risk. In addition, a robust, independent risk  management framework incorporates active management  and monitoring of risks arising within Macquarie. The  operation of this framework and oversight by RMG are  major mitigants to reputation risk.  Macquarie operates under a strong corporate governance  structure consistent with the regulatory requirements of  various regulators including the Australian Securities &  Investments Commission (ASIC), the Australian Securities  Exchange (ASX) and Australian Prudential Regulation  Authority (APRA). Goalsand Valuesincorporating a clear  code of ethics are communicated to all staff and regional  Integrity Officers deal with potential issues of integrity.  The Compliance Division is an independent function  responsible for ensuring that all Compliance Risks are  appropriately assessed and managed across Macquarie. An internal funds transfer pricing framework is in place that has  been designed to produce appropriate incentives for business  decision-making by reflecting the true funding costs arising  from business actions. Under this framework, each business is  allocated the full cost of the funding required to support its  products and business lines, recognising the actual and  contingent funding-related exposures their activities create for  the group as a whole. Businesses that raise funding are  compensated at a level that is appropriate for the liquidity  benefit provided by the funding.  All activities have embedded elements of reputation risk.  Managing reputation risk is an essential role of senior  management as it has the potential to impact both earnings  and access to capital. Macquarie seeks to manage and  minimise reputation risk through its corporate governance  structure and risk management framework.  a business General Counsel who reports to the General  Counsel and to the relevant Operating Group Head. 