Contribute 12/7/99 by david mize Treasury Auction Audit (Bank) Operations Risks Calculation of the net long position (NLP) does not include all securities as required by the Treasury. Including securities with same CUSIP number as the security being auctioned, different CUSIPs for the Principal STRIPS, When-issued trading, future contracts, and forward contracts. (C) Select a sample of NLPs reported on 3 largest take downs between June through December 19xx and review documentation to ensure all securities positions are included in the calculation as required by the Treasury and calculations are accurate. Participate in two auctions during week of xx19xx. Through observation, determine how the NLP is captured (time, source, etc...). Upon completion of auction, obtain all documentation to recalculate the NLP reported. Calculation of the net long position (NLP) does not appropriately include all business lines/entities within the Corporation. Select a sample of 3 auctions dates and determine that all affiliates that should report a NLP are recorded on the Auction Reporting Sheet. Use same sample that is selected above for testing. Participate in two auctions during week of xxx. x, 19xx. Through observation - determine that all affiliates responsible for reporting a NLP are recorded on the Auction Reporting Sheet. Net long positions (NLPs) calculated and submitted by affiliates may be inaccurate. Determine systems and processes utilized to obtain information to calculate NLP. Also, see tests for 1st and 2nd risks above. Bids are submitted incorrectly, and may be canceled/corrected at the discretion of the FRB. (both) Through observation of several live auctions determine that a review process is in place. For sample of prior auctions selected for testing, ensure bid on quote sheet agrees to confirmation of bid received by the FRB subsequent to bid submission. Potential operational issues with processing TIIPS. Determine through inquiry and observation with personnel, that the BOLT system has been upgraded to accurately process TIIPS. The NLP calculation is determined through use of information contained on individually maintained blotters, rather than from the various systems used to record trading activity. Technology Risks Failure of Treasury's Automated Auction Processing System (TAAPS) for actual submission of bid to FRB. (both) Through inquiry, determine the number of system failures within the last 6 months and frequency of use of phones/fax for bid submission. Determine adequacy of back-up/contingency plans. System malfunction such that the firm is unable to capture the net long position of the CUSIP being auctioned, at all or in a timely manner. See Operational Risks - 2nd risk for effectiveness testing to be performed. Inefficient application input controls to TAAPS could lead to errors and irregularities. (both). Obtain access records to determine adequacy of persons with access to TAAPS application. Determine through inquiry and observation (on-site auction reviews week of xx/xx/xx), the application controls in place to ensure data integrity and completion. Systems are not yet capable of handling all processing related to Treasury Inflation Index Protected Securities, resulting in inflation adjustments not being properly calculated. (C) Through inquiry, determine when system upgrades will be completed and user acceptance testing (UAT) has been performed. Determine processing concerns and evaluate adequacy of manual processes to compensate for lack of sufficient technology. Strategic Risks Newly acquired businesses, through mergers and acquisitions, may not become properly integrated within the parent company. Primary Dealer status requires involvement in all auctions for competitive bids of xxx Corp. (excluding Asset Management). Obtain 3rd and 4th quarter 1997 auction schedule from Bloomberg or Internet. Compare auction schedule to the Allotment Schedule maintained by PDU NY to determine whether Corp participated in all auctions as required. A bidder bidding competitively for its own account may not bid non-competitively for its own account in the same auction, and vice versa. (both) Determine that bids have not been submitted competitively and non-competitively for own account in the same auction. Include in sample Treasury bills, notes, bonds. Determine that bids have not been submitted competitively and non-competitively for a customer in the same auction. Include in sample Treasury bills, notes, bonds. Also, inquire of Sales how they monitor for compliance with this rule. Market Risks Inadequate tracking of the market could lead to a bid submission with a lower yield than current market, creating potential future loss opportunities. Compare yields on bids to the average market price for the day. Pursue differences greater than __2__bp or %. Using 3rd and 4th quarter 19xx auction schedule obtained from Bloomberg, select a sample of 5 auctions and compare yield submitted to other yields accepted during bidding process. The submission of an unrealistic yield in an attempt to limit participation in the auction. (C) See effectiveness above for 1st risk. Also, determine through inquiry and observation of auction activity week of xx 19xx, that a review process is in place and operating effectively.