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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

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  • $\begingroup$ Why did you post commodity tag? $\endgroup$ – emcor Sep 23 '14 at 16:44
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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

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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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