Volume 2 — Governance and ControlsGovernance and Controls © Copyright 2002, All rights reserved 33 Key Reports • Price discovery reports (broker quotes, electronic trading platforms, data feeds). • Price curve validation reports. • Model testing and validation reports. • Model user and technical documentation. 1.3.3 Risk Control and Analysis Process Overview The risk control and analysis process consists of verifying the MTM valuation, calculating daily P&L, reconciling the P&L, calculating risk measures such as VaR, EaR, and CFaR, performing sensitivity analysis, performing stress testing, analyzing liquidity risk, and calculating any other risk metrics. Objectives • Standardize the types of risk measures and their method of calculation in a way that corresponds to industry best practices. • Ensure that transactions are valued appropriately. • Gain an understanding of where risks concentrations lie in the portfolio. • Quantify the risks in the portfolio. • Evaluate the profitability of an activity. • Analyze the potential impact of changes in the market on the portfolio. • Assess the return on the portfolio based on the amount of risk taken. Best Practices and Controls 1) Marking Transactions to Market • For risk management purposes, physical and derivatives positions should be marked to market on at least a daily basis.5 • Marking to market is the only valuation that correctly reflects the current value of derivatives cash flows to be managed and provides information about market risk and appropriate hedging actions.6 • Daily change in MTM should be adequately documented and explained by new deals, changes in reserves, roll-off of old deals, or changes in the “Greek” risk exposure measurements. • MTM should be calculated on both a nominal and a PV basis. 5 The Group of 30—Recommended Best Practices for Risk Management, July 1993 6 Ibid.