Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 21 • All models should be interfaced with the trading and risk management system. • All models and interfaces should be tested to ensure proper functionality. • A deal approval sheet should be routed internally among all levels of the organization for signature. Key Reports • Price discovery reports (e.g., broker quotes, electronic trading platforms, data feeds). • Position report in total and by region, book, or trader. • P&L report in total and by region, book, or trader. • Deal approval sheet. • Inventory of approved models. • Model documentation and validation report. 1.1.4 Price Curve Development Process Overview A price curve is essentially a graphic illustration of prices for one commodity and one location over time. For purposes of this section, “price” includes correlation and volatility. Prices are obtained from broker quotes, online trading platforms, industry publications, forward projections based on historical trends or fundamental analysis, extrapolation techniques, trades executed with third parties, and other methods. The data-collection process is referred to as “price discovery.” The price curve is generally disaggregated into two components based on liquidity: market years4 (forward periods with liquid markets) and non-market years (forward periods without liquid markets), based on liquidity. The front office is responsible for price discovery for determining the value of the transactions in a company’s portfolio. Traders, the most active market participants, continuously perform price discovery throughout the day and provide data for the more liquid portion of the price curve. All prices provided by the front office should be validated by the middle office. As projections extend into the future, where markets become illiquid and available prices harder to determine, models are typically used to value the prices for these non-market years. Such models should be evaluated and approved by the middle office. Objectives • Value business transactions using current market data or models. • Ensure that forward price curves are reasonable and reflect reality. • Ensure that curves are developed using sound methods approved by the middle office. 4 See the Valuation and Risk Metrics White Paper for the definition of market years