Handling Risk Reports Affected by Trading System Inaccuracies
Summary
The document considers how to report trading risk when a newly implemented risk management system has unresolved technical problems that can create misleading profit and loss swings. It weighs using a general haircut to smooth reported values against the risk that such an adjustment could conceal genuine market exposure or excessive losses.
The answers favor documenting a process for investigating profit and loss that breaches defined thresholds, then correcting or adjusting specific items when a technology issue is identified and its effect can be estimated. A blanket haircut is described as potentially masking real problems, while targeted treatment is more attributable. The discussion does not define thresholds, quantify model error, or provide a standardized calibration method for any adjustment; it offers governance guidance that depends on understanding the system’s limitations and tracing individual discrepancies.
Key ideas
- Technical defects in risk systems can create profit and loss swings that distort perceptions of market exposure.
- A blanket haircut may obscure genuine excessive profit and loss that deserves investigation.
- Document threshold-based reviews and investigate unusual profit and loss before adjusting reports.
- Apply adjustments to individual items when the technology issue and its impact can be identified more precisely.
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Full text
# is there an accepted method for quantifying risk of inaccuracy of nascent trm systems? # is there an accepted method for quantifying risk of inaccuracy of nascent trm systems? Have a somewhat meta question here. I am part of a trading risk management implementation project. I also manage day to day risk reporting to management and the trading desks. Our implementation was successful in that the risk modeling is much more accurate than the spreadsheets. However there are still issues with the system that turn up and create an impact to pnl for the books. The swings up and down due to system issues send a bad message about the amount of market risk that is being taken on I'd like to apply something like a haircut to the book value and smooth out these technology related issues, but I'm not sure if that is an acceptable business practice. Assume that you have no say or input on the state of the system itself ## Answer by levocap (score 1) https://quant.stackexchange.com/a/12773 Can you describe what kind of problems you are having? What are the system issues that you are talking about? As long as you understand the limitation of the system, you can always caveat the result by placing some arbitrary 'haircut' to discount the potential error in said limitations ## Answer by Degustaf (score 1) https://quant.stackexchange.com/a/14835 I think a blanket haircut is a bad idea as it could mask actual excessive P&L that should be flagged. I would recommend a documented process where P&L that exceeds a threshold is investigated and technology issues can be handled by hand. In this situation, you can more safely apply a haircut to individual items where you can identify the technology issue and more precisely estimate the actual P&L.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.