Message-ID: <10994071.1075863692932.JavaMail.evans@thyme> Date: Mon, 12 Jun 2000 06:35:00 -0700 (PDT) From: david.port@enron.com To: fernley.dyson@enron.com Subject: Re: UK Gas late deal input and deal booking errors - o1.1m hit Cc: steve.young@enron.com, ted.murphy@enron.com, sally.beck@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: steve.young@enron.com, ted.murphy@enron.com, sally.beck@enron.com X-From: David Port X-To: Fernley Dyson X-cc: Steve W Young, Ted Murphy, Sally Beck X-bcc: X-Folder: \Sally_Beck_Dec2000\Notes Folders\Europe X-Origin: Beck-S X-FileName: sbeck.nsf Sorry to hear about this one. I have some observations to make from my reading (and re-reading) of the account: 1 It looks like the old "undue influence" problem again. It seems some attempts were made by operations to follow up, but nothing happened. We tell our operations staff they have an obligation to dissent but we don't have any way to protect them if they do - there is still the fear that if they upset a trader they can get fired or held back in their career. And that is because twice a year, at the PRC, that can happen. This incident shows some of these attributes. For the operations process to be effective there has to be (and be seen to be) little significant influence from Commercial Groups over the ranking of the operations staff. 2 Whoever signed off the new deal lists in the DPR should be asked to confirm the basis on which they signed it. 3 Why wait for the traders to approve payments to brokers ? Brokerage is in the P&L and if operations are satisfied the trades are accurate and brokerage is at the agreed rate, they should simply pay the brokerage. 4 Two weeks to check telephone tapes is unacceptable - it should be done same day. I would not have waited for the traders to do it, but I would want to know why it took them so long. 5 Given that these (short) trades were absent from the portfolio during a highly volatile period of rising prices, I would wonder about motivation in addressing the position during this time. Essentially, if it had been correct we would have been reporting losses bigger than the ones we did. I would pursue explanations to points 2, 4 and 5. DP Fernley Dyson@ECT 06/12/2000 02:41 AM To: James New/LON/ECT@ECT cc: Richard Lewis/LON/ECT@ECT, Mike Jordan/LON/ECT@ECT, Robert Yeo/LON/ECT@ECT, Gail Hill/LON/ECT@ECT, Ian Sloman/LON/ECT@ECT, Steve W Young/LON/ECT@ECT, David Port/Market Risk/Corp/Enron@ENRON, Brent A Price/HOU/ECT@ECT Subject: Re: UK Gas late deal input and deal booking errors - o1.1m hit James, Thanks for the note. As described, this is an intolerable situation. I agree your action points, but we need timelines and quantitative measures of compliance/improvement - please could you provide a weekly update on this area specifically and until we are satisfied that things are as they should be. On a more general note - let's ensure that the 'Global Standards' address the lapses in timely action/follow-up identified here so that we can monitor performance across the business. Fernley James New 09/06/2000 10:03 To: Richard Lewis/LON/ECT@ECT, Fernley Dyson/LON/ECT@ECT, Mike Jordan/LON/ECT@ECT cc: Robert Yeo/LON/ECT@ECT, Gail Hill/LON/ECT@ECT, Ian Sloman/LON/ECT@ECT Subject: UK Gas late deal input and deal booking errors - o1.1m hit On the 7th of June Gas Risk Management became aware that two'late' trades had been entered into the gas trader's 'Blue book' which were both being booked significantly late and had a material negative P&L impact (negative o1.1m). The 'late' deals were done on the 3rd of February (Marcello Romano) and the 30th of March (Haakon Olafson) and were both forward starting sells for periods in 2003-2004. Background 1) Input errors For some considerable time we have been concerned with the number of deal input errors that have been occurring in the Gas area with the most significant number coming form the UK Gas traders. Numerous errors have been found by documentation and risk management over the accuracy and timeliness of entering deals into the 'blue book' (the Gas traders are currently the only traders in Europe who do not enter their own trades into the valuation system - there is currently a big push to change this which has the support of John Sherriff with a deadline date of 31 July). In the past documentation and gas risk management have repeatedly highlighted booking errors to the gas traders but the error rate has not fallen. A log of all deal input errors has been formally maintained since the beginning of May which highlights an error rate of 12%-15% of non EOL trades. This has been discussed with Richard Lewis and corrective action is expected. 2) Deal booking and reconciliation process (Non EOL trades) Deals are initially written into the 'blue book' by the gas traders when the deal is done. This book is photocopied several times a day and the deals are the manually input into GasDesk by documentation on the same day. Faxed broker statements are received (usually) by documentation the next day and these are reconciled to GasDesk with errors and amendments made by documentation liasing with the traders as necessary. At this time brokers were faxing one statement per trade (relevant later). 3) New Deal sign off As part of the daily DPR process a separate new deal sheet is prepared and is signed off by the traders to formally agree the new deals done on the day and the implied origination P&L. For the 3rd of February Marcello signed off the new deals sheet and for the 30th of March Jonathan Whitehead signed off. 4) Documentation convention In the gas market the convention is that the seller sends deal documentation. (relevant later). Documentation aim to get this out within one the day after trade booking. 5) Brokerage invoices Brokerage invoices are usually received monthly by settlements who then reconcile the trades on the invoice to the valuation system to ensure the deal is valid before passing the reconciled invoice to the traders to authorise for payment. Any deals which cannot be found are raised with documentation who then investigate and follow up with the traders. Specific details of these 'late' trades 1) Summary For both these trades no evidence can be found of receiving, or can it be established that we did not receive, a broker statement which is a primary control in agreeing the existence and accuracy of new OTC deals. As Enron was the seller in both cases no documentation was received from either counterparty which would have alerted us to the trade. The reconciliation of the brokerage invoices was carried out by settlements in April and was completed by the 20th with the invoices falling due for payment on the 27th. The work practice at that time was that brokerage invoices (including those with non reconciling trade queries) were batched together and passed to the traders. This would have taken place on the 27th of April. Details on exactly what was said and done in the 3 weeks between passing these invoices to the traders for approval (although there are claims that verbal follow up were made on a number of occasions) and when a mailed follow up was made on the 22nd of May are hazy. What is clear is that on the 22nd of May Morgan Stanley contacted Enron to try to confirm their position which was when it was realised that an error could well have occurred. Over the next two weeks tapes were then checked by the traders with the deals being booked on the 6th of June. 2) Deal specifics EES Broker - Morgan Stanley trade on 3 Feb 2000 Trader Marcello EES Invoice date 1 March; Invoice received before 15 March as settlements started checking it. (Keren Perrott - settlements started on 13 March) Discrepancies sent to documentation on 23 May (Chris Ware to Emma Thomson) Traders contacted on 24 May after copy of broker confirm was sent on 22 May as requested by documentation to prove deal. Deal entered 6 June after traders checked the tapes. IEB Broker - NP trade on 30 Mar 2000 Trader Haakon IEB invoice date 6 April; Invoice received before 27 April as settlements started checking it. (Keren Perrott) Discrepancies sent to documentation on 23 May (Chris Ware to Robert Vaughn) Traders contacted on 24 May after copy of broker confirm was requested. Deal entered 6 June after traders checked the tapes. Who was at fault and where did the control break down ? I do not feel it is constructive to try to attach blame for what happened but there are lessons to be learned and general observations and conclusions that can be made and drawn. Firstly there are major concerns over the Gas trader's accuracy and prioritisation of booking trades. Despite numerous conversations on the subject very little improvement has been seen. It has now got to the stage where documentation are formally recording all errors including what the error was and who made it. This is now being communicated to Richard Lewis every two weeks with the aim being not only to reduce the amount of time trade support spend correcting errors and re running DPRs but also to try to avoid the incidence of errors such as this. The current error rate is 12% - 15% of non EOL trades. Documentation currently estimate that in 9 times out of 10 the broker or counterparty are correct. Secondly around a month ago we contacted brokers and asked for them to provide us with one statement per day rather than one per deal which will eliminate any lost statements or missed deals as it will be immediately obvious when a statement from a broker has not arrived. Most brokers have now changed but one or two still send one statement per trade. Reconciliation's of these daily statements to GasDesk are evidenced. Thirdly it has been impressed on both documentation and settlements to follow up more vigorously (and by mail) errors and omissions on a more timely basis. There is however a backlog or broker invoices which have have been checked by settlements but have nto been checked or approved by the traders. This is causing concern at the brokers who are chasing payment. Action Points Trading Traders to input their own deals directly into GasDesk Traders to improve their accuracy of deal booking Traders to approve invoices on a more timely basis Trade Support Settlements to clear backlog of broker invoices Documentation to chase brokers to send daily deal statements not individual deal statements All follow ups to be evidenced with mails used as appropriate Documentation to check all trades since the beginning of the year versus the broker records Documentation to perform a reconciliation with all counterparties to agree our forward position from July 2000 to September 2006 (the traded part of the curve)