Re: Limit Violations and Notifications Process

Shona -
RAC and Risk Ops are in this together and of course we'll continue to help in
understanding the violations. I recognize and sympathize with the strain
your group is under with all the systems problems, the UK DPR issues, the
increased limit change and policy compliance activity, etc.. My suggestions
were: 1) meant to streamline the process for you by making your data
gathering process easier, 2) I was offering to "be the bad guy" and point out
to the traders what we want them to do, and 3)meant to strengthen the
effectiveness of our risk management framework in this environmeant of
increasing exposure and volatile markets by reinforcing to the traders their
accountability for their positions and compliance with the policy limits.

I think the confusion here is violation explanations being "validated" by
the traders as you indicated below, vs. "provided" by the traders as we
envision. I confirmed with Ted, the traders are accountable for providing
the explanation. I'm not sure how the suggestions below would be a set back
to your efforts of getting memos out earlier. We're suggesting the traders
should provide you with explanations first thing in the morning, so that you
do not have to go through all the effort as you do now, of trying to track
people down in the afternoon and get explanations. It should be the traders
responsibility to get them to you, and they should be reviewing their
positions every morning before they even begin trading., and should be able
to easily explain why they're in violation or why they had a big loss.
Whether the traders call your group directly and leave a voice mail, or they
talk to their Ops business unit controller who relays the explanation to you
- whatever you think makes sense and works for you. I'm not trying to
manage the process, just to help design one that makes it easier for you and
is still effective from a risk management stand point.

At this point in this long series of e-mails, why don't we just talk face to
face. I can tell from your response you feel we're somehow not being team
players, but that is not my intent at all. I've tried to go out of my way
the past few weeks to tell you and your group how much Market Risk values and
appreciates your efforts. And really, I thought I was helping by using the
policy's influence to help develop a better process that would decrease the
time and effort your group has to spend on the policy compliance reporting.

Perhaps a meeting with you and I and Sally would be appropriate. We can talk
about this and any other questions or concerns you might have with RAC's
expectations. I agree, we do have significant mid-office needs, and you have
been absorbing more tasks in the past couple of months since I joined RAC;
and my view is our needs seem to only be increasing as additional risk
reporting is required every day by Skilling. We can continue to work on
streamlining processes, but maybe we need to think about staffing in our
respective groups and corresponding responsibilities. I'm willing to do
whatever is needed, and I don't think Ted is hung up on who does what
either. It's just that right now we're staffed with the expectation that
Sally's group handles the reporting and ongoing data maintenance type of
activities related to our risk management systems.

Best Regards,
Cassandra.

---------------------- Forwarded by Cassandra Schultz/NA/Enron on 12/07/2000
03:40 PM ---------------------------

From: Shona Wilson 12/07/2000 03:33 PM

To: Cassandra Schultz/NA/Enron@Enron
cc: Michael Benien/Corp/Enron@ENRON, Chris Abel/HOU/ECT@ECT, Daniel
Falcone/Corp/Enron@ENRON, Veronica Valdez/HOU/ECT@ECT, Sally Beck/HOU/ECT@ECT

Subject: Re: Limit Violations and Notifications Process

Dear Cassandra,

Thanks for the message. I believe it if fully understood by us and the
individual risk management groups that explanations must be validated by the
traders. Are you in addition saying that your group (who has been very
helpful in the past) will no longer help us understand the cause of
violations/notifications? To me, this appears contrary to a team spirit
attitude, and not reflective of what you and I and Vlady and I had discussed
earlier today. Also, we are working toward getting the memos out earlier,
and this is a real set back to that process.

Thoughts?

To: Shona Wilson/NA/Enron@Enron, Michael Benien/Corp/Enron@ENRON, Chris
Abel/HOU/ECT@ECT, Daniel Falcone/Corp/Enron@ENRON
cc: Veronica Valdez/HOU/ECT@ECT, Sally Beck/HOU/ECT@ECT

Subject: Limit Violations and Notifications Process

Shona -

To share with the others our telephone discussion, the notification template
was not my request, it was requested directly by Skilling. I know your group
is working hard to meet mangagement expectations, and in accordance with your
request below, Market Risk is happy to help you transition into this revised
reporting format by reviewing the template prior to your distribution until
you are comfortable with the reporting requirements. The new P/L
notification limits and limit changes that will be in effect next Tuesday
should dramatically decrease the number of notifications, so that should
help. It probably makes sense to re-distribute the policy to your business
unit controllers and the traders so they understand the policy requirements.

Another issue that we discussed yesterday is the source of the violation
explanations. These should be provided to you by the head trader of that
commodity group. Under the policy, that commodity group manager is
responsible for compliance with the risk management policy for the
commodities under his responsibility, along with the head of the energy ops
for that commodity group. If the traders are not providing these
explanations to you or to your counterparts (ops desk head / business unit
controller), I'll be happy to send them an e-mail explaining their compliance
obligation under the policy. Why don't you talk to each of the business unit
controllers, consider whether a process is already in place for this feedback
(as I understand it is for Global Products, for example), and if you'd like
me to send an e-mail to whoever you're having difficulty with, I will - just
let me know who. Our Market Risk desk heads will be happy to review their
explanations, but the problem is, they can see whether they're short or long
and how the market moved in comparison, but it's the trader that can and
should explain why they took a position, whether they're adjusting it based
on the market moves, etc..

Let me know what else I can do to help streamline the process.

Regards,
Cassandra.

---------------------- Forwarded by Cassandra Schultz/NA/Enron on 12/07/2000
09:48 AM ---------------------------

From: Shona Wilson 12/07/2000 09:42 AM

To: Cassandra Schultz/NA/Enron@Enron
cc: Michael Benien/Corp/Enron@ENRON, Chris Abel/HOU/ECT@ECT, Daniel
Falcone/Corp/Enron@ENRON, Veronica Valdez/HOU/ECT@ECT, Sally Beck/HOU/ECT@ECT

Subject: Re: 12/5 Limit Violations and Notifications - Comments

Dear Cassandra,

In looking at the comments below there are several errors made buy us, one in
the template itself, and some suggestions. At your request, we have started
to prepare this in addition to the normal word violation/notification memos
and our other work. As you have certain requests and requirements, it would
be helpful for someone in your group to review it before it went out to
ensure it meets your requirements.

Please let me know if this is workable and who the reviewer should be.

Thanks,

Shona

To: Michael Benien/Corp/Enron@ENRON, Chris Abel/HOU/ECT@ECT, Shona
Wilson/NA/Enron@Enron, Daniel Falcone/Corp/Enron@ENRON
cc: Veronica Valdez/HOU/ECT@ECT

Subject: 12/5 Limit Violations and Notifications - Comments

I realize this has already gone out, but I see a few errors that we should
correct - and actually, I think we should call Skilling and Lay's (and
Buy's) assistants (Veronica will handle this) and see if we can just hand
deliver to them a corrected version early this morning, e-mail is OK for Ted,
David and I. I have a few other suggestions on format/reporting changes as
well.

The NA Power VaR of $51MM was not 105% over its VaR limit of $50 - that would
have been $52.5 to require a report to Skilling, (but if we had had to report
it, don't use "WSCC", try to spell out or just don't use)
UK Gas's VaR limit is not $4, it's $7.5MM
I can't tie in UK Gas' QTD and YTD P/L - shouldn't it be what's on the DPR,
adjusted for the portion of the structured derivatives that is gas - call
over to that Yeo person and get the info. from them please
The 2nd item for NA Gas shouldn't be listed like that as it looks like
another violation - the comment re: the VaR increase was mean to go at the
bottom under RAC comments
The Finance Committe Chairman notification for Agg. VaR is not 100%, it's
115% (notification requirement box)
EES had a VaR violation - $7.5 vs. 7 - that is a Skilling level violation
Let's have the "Re:" say "Limit Violations and Notifications for December 5,
2000"
Let's number them all sequentially rather than starting over at each level

Veronica will call you to coordinate re-distribution.

Going forward, we need to increase our level of review for these as they're
getting a lot of scrutiny given market dynamics and our increasing risk.

Thank you,
Cassandra.

---------------------- Forwarded by Cassandra Schultz/NA/Enron on 12/07/2000
07:38 AM ---------------------------

Michael Benien
12/06/2000 07:08 PM
To: Kenneth Lay/Corp/Enron@ENRON, Rosalee Fleming/Corp/Enron@ENRON, Jeff
Skilling/Corp/Enron@ENRON, Sherri Sera/Corp/Enron@ENRON, Rick
Buy/HOU/ECT@ECT, Karen K Heathman/HOU/ECT@ECT
cc: Cassandra Schultz/NA/Enron@Enron, Ted Murphy/HOU/ECT@ECT, David
Port/Market Risk/Corp/Enron@ENRON, Chris Abel/HOU/ECT@ECT

Subject: 12/5 Limit Violations and Notifications