Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 25 Best Practices and Controls • Manage positions by portfolio, based on risk decomposition and modeled in a timely and consistent manner. • Assign complex deals to an individual owner who works with all levels of the organization to communicate changes. This deal owner should execute transactions in support of the deal, optimize the deal value in response to changing market conditions, and ensure that the counterparty performs its tasks relative to the terms of the contract. • Assess the accuracy of the original assumptions and valuation. • Measure ongoing performance at least once a quarter to determine economic impact, if any. • Tie incentive pay for current and deferred components to the deal. Key Reports • P&L report. • Position report. • Budget versus actual report. 1.2 Deal Validation 1.2.1 Validating a Deal The process of validating a deal, a key control over deal entry, is essential to proper risk management. Deal validation can be broken down into three primary categories: validation of deal structure, valuation, and approval validation of deal entry and reconciliation of brokered transactions. Each is detailed below. Validation of Deal Structure, Valuation, and Approval of Structured Deals Process Overview During deal structuring, the middle office is responsible for reviewing the terms and structure of the deal and ensuring that the assumptions used are sound. Numerous analytical techniques are used to understand and quantify the risk. The metrics used depend on the type of deal structured. In general, the middle office should verify that a deal is properly structured and valued that it includes only approved products, commodities, and markets and is executed by authorized personnel and that it is accurately broken down into its individual risk components. Objectives • Before a deal is finalized with a counterparty: − Ensure that each risk component of the deal is correctly measured, modeled, priced, and reassembled in a structure that is consistent with the description of the deal. − Ensure that the value of the deal is accurately calculated.