Message-ID: <26329255.1075858639326.JavaMail.evans@thyme> Date: Wed, 23 May 2001 13:11:41 -0700 (PDT) From: k..allen@enron.com To: john.lavorato@enron.com Subject: Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Allen, Phillip K. X-To: Lavorato, John X-cc: X-bcc: X-Folder: \PALLEN (Non-Privileged)\Allen, Phillip K.\Sent Items X-Origin: Allen-P X-FileName: PALLEN (Non-Privileged).pst John, Managing VAR limits is essential and P&L Penalties are a great way to achieve this. However, we need to find a way to impliment this method while minimizing negative side effects such as: (1) discouraging aggressive trading; and (2) significant morale reductions caused by penalties which do not fit the crime. I still disagree with the $1 Million fine for such a minor violation of our VAR limit. The punishment does not fit the crime. What message are you trying to send? The message being received is that we should trade less aggressively and leave several million dollars of headroom at all times. Also locations such as Socal, Malin and PG&E should be avoided due to limited liquidity and potential volatility spikes. I know these are not your intended messages. I realize you have given the west desk significant leeway in the last few months regarding VAR. We have been making excellent progress towards VAR reduction in an environment in which the VAR calculation and tolerance are constantly changing. My suggestion for implementing a VAR control system that provides for penalties but gives traders room to probe for maximum VAR utilization is a warning for minor breaches (<$500,000) and penalties for violation of two or more consecutive days or initial violations greater than $500,000. The amount of the penalties should be documented in advance and should increase with the amount of the violation. Please consider these suggestions. We want to play by the rules, but the rules need to be fair and known in advance. Also, we are willing to accept these policy revisions retroactively and forget about the $1 million from this morning. Phillip