Subject: Liquidity Ratio Calculation and Definitions in Policy
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Wed, 1 Aug 2001 19:38:19 -0700 (PDT)

Ben/David/Bill -

Please see the what we have for the following policy excerpts at the end of this message, and address the following:

1.	Advisory Limit Setting - is it by the BOD or by the CEO?  Our presentation says CEO, but also specifies the trigger as 3.0 for P50 and 1.5 for P99.  If it's CEO level, we don't need to specify in the policy what the trigger limit is, as CEO can change.  If it's in the Policy itself, it's considered a Board approved limit. 
a.	Let's decide - if CEO level, let's change to say "a certain multiple of..." instead of 3.0 and 1.5
b.	If at Board level,  don't we need to specify a time horizon? If not, why bother to specify the trigger - if one's going to be at CEO discretion and consequently not specified in the policy itself, why not all of it?

2.	Definitions in 3.4 excerpt below - Rick Buy wants these definitions hard coded and clearly defined in the policy

?	Future Available Cash - 
?	Is this straight off a daily report from Accounting?  What does this # represent and what do we want in the policy?
?	which individual is going to provide this daily, and when?  
?	Borrowing Capacity - 
?	I defined this by pulling terms straight from the slide in the Joint Audit/Finance Committee presentation - do you agree?
?	who is going to calculate this daily and provide to RAC, and by when?
?	Potential Future Cash Requirements -
?	is this clear enough?  any specific collateral assumptions given contractual cash posting optionality?  worst case assumption?

3.	Does RAC really need to calculate this if GRMO is going to report it on the Executive Report Viewer, and the calculations are hard-coded above?  Seems like we could implement a process by which the 3 pieces of information get fed to GRMO to calculate and report, like all the other market risk metrics.

Please call me in the morning so I can run through any required changes.

Regards,
Cassandra.

3.4	Risk Measurement for Liquidity/Funding Risk
Liquidity/funding risk focuses on whether the Company is able to raise enough capital (whether through debt, equity, or counterparty collateral) to meet its cash and collateral requirements, and is a function of funding liquidity and position liquidity.  Margin deposits received and margin deposits required under the Company's Trading Portfolio have a significant impact on the Company's funding requirements, and are often determined by changes in commodity prices.  Position liquidity refers to the extent to which a position can be liquidated quickly, and in large volume, without substantially affecting the position's price.  Key determinants of the liquidity of a position and the cost of liquidation include: (a) the level of third-party interest and market activity in the asset, (b) the time period available to convert the asset to cash, (c) the size (value or volumes) of the asset, and (d) perception of the Company in the marketplace.  Active management of funding requirements and capital availability should minimize funding shortfalls.  See Section 4.4 for the limit structure and reporting guidelines.
The Liquidity Exposure Ratio ("Liquidity Ratio") is the primary metric of the Company's liquidity/funding risk to be implemented under a transition period determined by the Risk Management Committee.  The Liquidity Ratio shall be calculated daily over a specified time period by dividing (a) the sum of the Company's (i) Future Available Cash and (ii) Borrowing Capacity, by (b) the Company's Potential Future Cash Requirements.  Future Available Cash shall represent the Company's current cash-flow forecast as determined by the Accounting department, considering operating and investing activities.  Borrowing Capacity shall be determined by the Treasury department, and shall be calculated as the sum of: (a) commercial paper; (b) uncommitted bank lines and loan sales lines; (c) letter of credit facilities; (d) accounts receivable; (e) shelf registrations for public debt issues; and (f) shelf registrations for public equity issues.  Potential Future Cash Requirements shall be calculated by the Trading Portfolio's risk systems and shall represent a simulation of margin exposure and collateral requirements for the Trading Portfolio.
Liquidity stress testing shall be performed periodically, as determined by the Chief Risk Officer, to quantify the liquidity/funding risks associated with specific positions.  Such stress testing may include specific asset liquidity stress tests to quantify the risks associated with illiquid positions.  Results of liquidity stress testing will be made available to the CEO and to other parties at the discretion of the Chief Risk Officer.

4.4	Capital Associated with Liquidity/Funding Risk
Liquidity/funding risk arises from the potential that funding requirements will exceed funding availability for a given time period.  Funding requirements may vary over time as a result of: (a) exchange margin requirements, collateral obligations and collateral receivables primarily related to Trading Portfolio activities; (b) new investments; (c) the payment of interest and dividends; and (d) the maturing of debt and other obligations.  Funding availability may vary over time as a result of: (a) available cash; (b) access to capital markets; (c) available collateral; and (d) the time required to convert positions to cash or liquid assets.
The Company shall use the Liquidity Ratio, liquidity stress testing and other methods as specified by the Chief Risk Officer to measure liquidity/funding risk.
4.4.1	Limit Structure for Liquidity/Funding Risk
The CEO shall approve an advisory limit for liquidity/funding risk ("Liquidity Ratio Advisory") to be implemented under a transition period approved by the Risk Management Committee.  This shall be based on the Liquidity Ratio discussed in Section 3.4 of this Policy.  The Liquidity Ratio shall be calculated using two different assumptions to calculate Potential Future Cash Requirements, the denominator of the calculation: (a) a 50% confidence level, and (b) a 99% confidence level.
4.4.2	Administration/Reporting for Liquidity/Funding Risk
The Liquidity Ratio shall be calculated on a daily basis and reported by GRMO to the CEO, the Chief Risk Officer, and the Treasury department designee.  If the Liquidity Ratio is (a) less than 3.0 using a 50% confidence level to calculate Potential Future Cash Requirements or (b) less than 1.5 using a 99% confidence level to calculate Potential Future Cash Requirements, the Chief Risk Officer shall notify the CEO and others at his discretion.  The CEO shall direct senior management to take certain actions to mitigate the Company's liquidity/funding risk.