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Operational Risk:
deal confirmation, the last chance to say no

by Anne Ku (March 2001)

Table 1 Deals and Confirmations

Types of deals

Front Office

Confirmation Desk

Bilateral, direct with counterparty

Usually by voice (recorded phone conversation).

Online trading platforms of counterparties: EnronOnLine, DynegyDirect

Depending on the culture, either the buyer or seller initiates confirmation. This may be verbal or by fax. Online platforms automatically generate fax confirmations.


Voice (recorded phone) or on-line (HoustonStreet, ICE, TradeSpark)

Broker generates a confirmation for each counterparty. However, both counterparties still have to confirm with each other.

Regulated exchanges

Whether online or in an exchange, these have clearing functions. Examples: NYMEX, CBOT, KCBOT, IPE.

No need to confirm as the exchange is the counterparty and clears the deals.

Possible error scenarios (box)

  • Missing or trader drawer transaction: A trader makes a transaction but forgets to record it. This carries tremendous risk, as no one else knows about it until settlement.
  • Buy vs Sell: A trader buys energy but accidentally enters it as a sale, or vice versa. This is very dangerous, as it would result in a double profit and loss (P&L) hit. Assuming that the verbal trade was done correctly but one party enters it incorrectly and the error is not caught, the trader may be reporting an incorrect P&L on this trade. Once the error is discovered, usually at settlement, the incorrect P&L is reversed while the correct P&L is reported in a double whammy (a gain or loss).
  • Phantom Deal: Similar to when a trader does not record a deal, this is the case a deal being entered twice. A large company last year reported a multi-million dollar gain as prices moved up significantly over several months. After they took the erroneous loss off their books, this resulted in a very favorable profit swing. This could have easily gone the other way.
  • Other errors: deal attribute mis-specifications, such as price, volume, delivery point, period, currency, counterparty, to name a few. These may be caused by miscommunication, writing errors, typing errors, spelling errors, misinterpretation, or forgetfulness. However, these errors usually do not usually create the huge profit and loss swings that the buy/sell error, phantom, and missing deals cause."