Objective

To help a large Investment Bank implement an exception-based daily front-to-back P&L Analysis and Control Process across business divisions on its strategic risk management systems. The goal was to reduce the unexplained P&L between RBPL and Market Move attribution P&L and set thresholds for exception-based monitoring.

Challenge

P&L attribution must meet rigid criteria for desk-level performance and approval to permit use of internal models for capital calculations. For that reason, a comprehensive Risk-Based P&L (RBPL) approach based on sensitivities is needed to reduce the unexplained P&L between actual and theoretical P&L.

CRISIL's Solution

To meet the Client’s control and compliance requirement, CRISIL followed a comprehensive approach ensuring end-to-end data validation and reconciliation of RBPL and Profit and Loss Attribution (PLA) data and related processes and platforms for two business divisions.

• Data
  
  • Identified and sourced the required data across front-office (FO) and back-office (BO) applications:
    
    • Trade, Position and P&L data
    • Sensitivities
    • Market and Reference data
      
  • Established common identifiers for data across multiple risk systems and data sources within each business division
  • Resolved data gaps and data quality issues to ensure completeness and accuracy of data used in reconciliation
    
• Process
  
  • Conducted end-to-end data validation and reconciliation for books, positions, and PAA breaks between FO risk systems, Product Control Data Warehouse and Strategic Risk Data Store
    
  • Performed Root Cause Analysis of P&L breaks observed in attribution process
    
  • Co-ordinated with appropriate FO, BO and application teams for explaining and resolving P&L and data gaps
    
• Platform
  
  • Developed automated reconciliation tool to overcome the challenges of dealing with huge data volumes during testing and reconciliations of:
    
    • RBPL attribution to traditional market-move P&L attribution from FO risk systems;
    • New PAA data flows from FO against legacy adjusted PAA data in BO
      

Client Impact

• Helped the bank meet the regulatory (FED, FINMA) and internal (Product Control) requirements to implement a consistent risk-based P&L methodology across the strategic risk systems for T+1 reporting
  
• Integration of FO-generated risk sensitivities with P&L reporting (sent to Finance) provided for a unified business process across business clusters. This in turn improved risk aggregation accuracy and consistency across the business
  
• Reduced initial unexplained P&L position by more than 50%, thereby ensuring accuracy of P&L flowing into general ledger from sub ledger
  

Questions

Looking for high-end research and risk services? Reach out to us at: