Integration of an exception based daily front to back P&L Analysis and Control process across business divisions for a large investment bank
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Objective
Large Investment Bank had to implement an exception based daily front to back P&L Analysis and Control process across business divisions on its strategic risk management systems
Reduce the unexplained P&L between RBPL and Market Move attribution P&L and setting thresholds for exception based monitoring
Challenge
Under Intermediate Holding Company (IHC) regulation in US and Fundamental Review of Trading Book (FRTB), P&L attribution is one of the tools in conjunction with back testing that must meet rigid criteria for desk level performance and approval to permit use of internal models for capital calculations
A comprehensive Risk Based P&L (RBPL) approach based on sensitivities is needed to reduce the Unexplained P&L between actual P&L and theoretical P&L
CRISIL's solution
To meet 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 for two business divisions and in parallel optimising related processes and platforms
Data:
Identify and Source the required data across FO and BO applications
Trade, Position and P&L data
Sensitivities
Market and Reference data
Establish common identifiers for data across multiple risk systems and data sources used within each business division
Resolve data gaps and data quality issues to ensure completeness and accuracy of data used in reconciliation
Process:
Conduct 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
Perform Root Cause Analysis of P&L breaks observed in attribution process
Co-ordinate with appropriate FO, BO and application teams for explaining and resolving P&L and data gaps
Platform:
Develop automated reconciliation too 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 for PC 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
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