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Enron Mail |
1=09CEO but leave 3.0 and 1.5 thresholds - if we need to change we'll chang=
e and then BOD can ratify as with other policy changes - they will certainl= y require some feedback on the metric. 2=09Numerator from Global Finance, not Accounting. FAC and BC as previously= defined 3=09I think the PFCR definition is adequate If our position liquidity horizon is about 10 days it should be revised wee= kly or when there is a big market move ("weekly or as markets dictate") RAC should orchestrate the calculation, as a "prototype" which when bedded = down and stable can be passed to GRMO DP -----Original Message----- From: =09Schultz, Cassandra =20 Sent:=09Wednesday, August 01, 2001 9:38 PM To:=09Glisan, Ben; Port, David; Bradford, William S.; Buy, Rick Cc:=09Vonderheide, Scott; Andrews, Naveen; Gorny, Vladimir; Deville, Mike; = Despain, Tim; Perkins, Mary Subject:=09Liquidity Ratio Calculation and Definitions in Policy Ben/David/Bill - Please see the what we have for the following policy excerpts at the end of= this message, and address the following: 1.=09Advisory Limit Setting - is it by the BOD or by the CEO? Our presenta= tion says CEO, but also specifies the trigger as 3.0 for P50 and 1.5 for P9= 9. If it's CEO level, we don't need to specify in the policy what the trig= ger limit is, as CEO can change. If it's in the Policy itself, it's consid= ered a Board approved limit.=20 a.=09Let's decide - if CEO level, let's change to say "a certain multiple o= f..." instead of 3.0 and 1.5 b.=09If at Board level, don't we need to specify a time horizon? If not, w= hy bother to specify the trigger - if one's going to be at CEO discretion a= nd consequently not specified in the policy itself, why not all of it? 2.=09Definitions in 3.4 excerpt below - Rick Buy wants these definitions ha= rd coded and clearly defined in the policy ?=09Future Available Cash -=20 ?=09Is this straight off a daily report from Accounting? What does this # = represent and what do we want in the policy? ?=09which individual is going to provide this daily, and when? =20 ?=09Borrowing Capacity -=20 ?=09I defined this by pulling terms straight from the slide in the Joint Au= dit/Finance Committee presentation - do you agree? ?=09who is going to calculate this daily and provide to RAC, and by when? ?=09Potential Future Cash Requirements - ?=09is this clear enough? any specific collateral assumptions given contra= ctual cash posting optionality? worst case assumption? 3.=09Does RAC really need to calculate this if GRMO is going to report it o= n the Executive Report Viewer, and the calculations are hard-coded above? = Seems like we could implement a process by which the 3 pieces of informatio= n get fed to GRMO to calculate and report, like all the other market risk m= etrics. Please call me in the morning so I can run through any required changes. Regards, Cassandra. 3.4=09Risk Measurement for Liquidity/Funding Risk Liquidity/funding risk focuses on whether the Company is able to raise enou= gh capital (whether through debt, equity, or counterparty collateral) to me= et its cash and collateral requirements, and is a function of funding liqui= dity and position liquidity. Margin deposits received and margin deposits = required under the Company's Trading Portfolio have a significant impact on= the Company's funding requirements, and are often determined by changes in= commodity prices. Position liquidity refers to the extent to which a posi= tion can be liquidated quickly, and in large volume, without substantially = affecting the position's price. Key determinants of the liquidity of a pos= ition and the cost of liquidation include: (a) the level of third-party int= erest and market activity in the asset, (b) the time period available to co= nvert the asset to cash, © the size (value or volumes) of the asset, and = (d) perception of the Company in the marketplace. Active management of fun= ding requirements and capital availability should minimize funding shortfal= ls. See Section 4.4 for the limit structure and reporting guidelines. The Liquidity Exposure Ratio ("Liquidity Ratio") is the primary metric of t= he Company's liquidity/funding risk to be implemented under a transition pe= riod determined by the Risk Management Committee. The Liquidity Ratio shal= l be calculated daily over a specified time period by dividing (a) the sum = of the Company's (i) Future Available Cash and (ii) Borrowing Capacity, by = (b) the Company's Potential Future Cash Requirements. Future Available Cas= h shall represent the Company's current cash-flow forecast as determined by= the Accounting department, considering operating and investing activities.= Borrowing Capacity shall be determined by the Treasury department, and sh= all be calculated as the sum of: (a) commercial paper; (b) uncommitted bank= lines and loan sales lines; © letter of credit facilities; (d) accounts = receivable; (e) shelf registrations for public debt issues; and (f) shelf r= egistrations for public equity issues. Potential Future Cash Requirements = shall be calculated by the Trading Portfolio's risk systems and shall repre= sent a simulation of margin exposure and collateral requirements for the Tr= ading Portfolio. Liquidity stress testing shall be performed periodically, as determined by = the Chief Risk Officer, to quantify the liquidity/funding risks associated = with specific positions. Such stress testing may include specific asset li= quidity stress tests to quantify the risks associated with illiquid positio= ns. Results of liquidity stress testing will be made available to the CEO = and to other parties at the discretion of the Chief Risk Officer. 4.4=09Capital Associated with Liquidity/Funding Risk Liquidity/funding risk arises from the potential that funding requirements = will exceed funding availability for a given time period. Funding requirem= ents may vary over time as a result of: (a) exchange margin requirements, c= ollateral obligations and collateral receivables primarily related to Tradi= ng Portfolio activities; (b) new investments; © the payment of interest a= nd dividends; and (d) the maturing of debt and other obligations. Funding = availability may vary over time as a result of: (a) available cash; (b) acc= ess to capital markets; © available collateral; and (d) the time required= to convert positions to cash or liquid assets. The Company shall use the Liquidity Ratio, liquidity stress testing and oth= er methods as specified by the Chief Risk Officer to measure liquidity/fund= ing risk. 4.4.1=09Limit Structure for Liquidity/Funding Risk The CEO shall approve an advisory limit for liquidity/funding risk ("Liquid= ity Ratio Advisory") to be implemented under a transition period approved b= y the Risk Management Committee. This shall be based on the Liquidity Rati= o discussed in Section 3.4 of this Policy. The Liquidity Ratio shall be ca= lculated using two different assumptions to calculate Potential Future Cash= Requirements, the denominator of the calculation: (a) a 50% confidence lev= el, and (b) a 99% confidence level. 4.4.2=09Administration/Reporting for Liquidity/Funding Risk The Liquidity Ratio shall be calculated on a daily basis and reported by GR= MO to the CEO, the Chief Risk Officer, and the Treasury department designee= . If the Liquidity Ratio is (a) less than 3.0 using a 50% confidence level= to calculate Potential Future Cash Requirements or (b) less than 1.5 using= a 99% confidence level to calculate Potential Future Cash Requirements, th= e Chief Risk Officer shall notify the CEO and others at his discretion. Th= e CEO shall direct senior management to take certain actions to mitigate th= e Company's liquidity/funding risk.
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