Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 18 management has decided to move forward with the new business, the revised plan is sent to the ROC for approval or rejection. If it is approved, limits are set, authorizations made, and the desired activity communicated to the organization. Objectives • Ensure that due diligence has been performed before a company enters new markets, trades in new commodities, or introduces new products. (Products include assets, origination deal structures, and other offerings.) • Develop a full understanding of the market, including risks. • Establish proper management approval before entering into contracts in new markets, with new commodities, or with new products. Best Practices and Controls • Senior management should meet regularly with the front office to develop short- and long-term strategies and enhance communication of corporate direction and risk tolerances. • The front office should develop new business after extensive research it should document the information in a market business plan or risk analysis report. This documentation includes, but is not limited to, industry background, entry and exit plans, risk analysis, return on investment, and proposed limits. Before its plan is approved, the middle office should validate the appropriateness of the market research, models, curves, and assumptions used to value the new business. Additionally, the middle office should independently identify and quantify the various risks involved in accepting the new business activity. • To ensure compliance, the middle office should compare the proposed new business activity to the parameters defined in the risk policy. • The market business plan or risk analysis report should be presented to the ROC for approval or rejection. • The middle office should maintain a list of approved commodities, markets, and products. This list should be made available to all front-office personnel for easy reference. • The front office should communicate the new business information to the rest of the front, middle, and back offices to ensure that the system can capture the risk, contracts can be developed, and the proper accounting treatment can be achieved. Key Reports • Market business plan or risk analysis report. • List of approved commodities/markets/products.