Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 16 II BEST PRACTICE PROCESSES AND CONTROLS The following section provides clear and concise directives for business processes for typical energy trading and marketing activities. It is not meant to be prescriptive, but rather to serve as a high-level aggregation of industry best practices surrounding certain processes. This section will: • Publish processes and controls that reflect general corporate policies these policies, when implemented, establish uniform practices and proper segregation of duties across the corporation. • Enhance business capabilities by: − Disseminating knowledge of best practices. − Developing process guidance for employee training. − Fostering communication inside and outside the corporation. − Identifying how IT systems can effectively streamline processes. Note that the best practices herein are offered as a resource. Their use is voluntary, and no company has agreed to or is required to use them. In addition, they may be modified as appropriate by individual companies, and they do not relieve any company from the need to comply with their legal and professional requirements. Note that for companies with a corporate risk management department, some functions described here that are performed by the middle office may be performed by, or with the assistance of, corporate risk management. 1.0 Deal Life Cycle In general, the processes performed by energy trading and marketing companies center on execution, validation, risk management, and accounting of individual transactions together, these processes can be labeled as the life cycle of a deal. Before a deal is executed, senior management works with the front office to establish strategies that develop the business in alignment with the risk/reward profile of the company. The front office then executes deals that satisfy that strategy. More complex or long-term deals may require additional structuring or pricing to assess their true value. If a deal is within defined limits and the terms are approved, a contract is put in place. The deal is then executed with the counterparty and the terms are captured in a system. The deal is then assigned to a portfolio for ongoing management over the term of the deal as market conditions change. If a deal requires the movement of a physical commodity, the front office schedules product flow with a transportation provider. After a deal has been executed and captured, the middle office must independently verify the accuracy of the terms through system reconciliations, third-party confirmations, and risk analytics. These processes serve as key control functions over the deal execution process. The credit and contract administration groups will also monitor the deal over its life, ensuring that contract provisions are maintained and credit risk managed. Once the deal has reached its term and the contract provisions have been satisfied, the back office will settle the deal (i.e., resolve