P&L Attribution

Overview

Regulators have increased their focus on ensuring that risk sensitivities are properly linked to real world P&L figures, a position that was highlighted in the Basel Committee May 2012 Consultative Document. As well as helping to meet this regulator scrutiny, a proper P&L explain processes is a vital part of any risk control architecture and ensures proper capital treatment.

The case study below is an example of Calimere Point Risk Advisory’s strong track record of scoping, developing and delivering P&L attribution solutions for financial services and a more in depth look at our approach to P&L attribution can be found here:

CPRA P&L attributionCPRA P&L attribution approach and reporting

Challenge

Market volatility had increased a client’s need for a sensitivity-based and daily generated P&L attribution process across a number of asset classes. An automatic comparison with the reported P&L was also required that included a user warning system.

Solution

  • CPRA built a proof of concept application that captured trade information from two trading systems, initially for CDS and cash bond positions. The application took all trade positions, matched them to greek sensitivities, and then calculated the daily P&L for each sensitivity and groups by position. The data is compared to the reported P&L, with unexplained P&L above a set threshold investigated.
  • Additional product types were added once the proof of concept was approved and the process also lead to valuation curves being corrected for some of its portfolios.

Result

  • The client received a prototype application that was handed to IT for the construction of a production system with the following benefits:
    – A full understanding of where the daily reported P&L is generated
    – An automated, robust process that captures the full trade population
    – A transparent analysis where the market data and risk for any position can be linked to the
       reported P&L
    – A fully scalable application that includes new products when traded.
  • The client enjoyed additional benefit as CPRA’s analysis revealed some process inconsistencies and methodology that was then corrected.
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