eml capital adequacy liquidity jeff john drafted note relating business operations enron metals limited eml know particularly concerned watching cash position thought would benefit understand unique situation eml regulatory standpoint review would happy set meeting discuss concur actions suggested please advise balance sheet debtor creditor cash forecast information require please let us know drew lynch kevin heffron jonathan marsh joe gold introduction enron metals limited eml maintains unique position within enron corp eml one enron two businesses regulated uk financial services authority fsa uk financial regulator enron remaining brokerage business given special status eml responsibilities clients codified enforced rules fsa lme metals exchange member result regulatory oversight several differences eml enron businesses 1 eml must conduct business compliance prescriptive regulatory rules relating among areas capital adequacy conduct business failure comply regulatory requirements result disciplinary action taken company officers 2 virtue position lme broker certain circumstances eml regarded acting agent clients eml policy avoid acting agent possible however eml conduct evaluated fsa light potential relationship exist eml conducts clients tightly regulated fsa lme 3 fsa duty protect orderliness uk markets protect systemic risk eml position provider liquidity potential disturb market conduct lack conduct also area concern fsa lme consequence concern fsa requires regulated entities maintain prescribed amounts capital protect certain risks position credit risk rules relating regulatory capital require fsa regulated firms calculate financial resources requirement accordance rules maintain financial resources excess requirement rules prescriptive types capital used way regulatory capital breach rules regarded extremely serious ongoing ability meet financial resources requirement usually results fsa issuing order requiring firm cease carrying business 4 eml board members traders subject direct regulatory oversight fsa disciplined individual capacity breach rules penalties individuals include significant fines possible expulsion industry duties owed board members fsa rules addition owed general uk law relating directors duties directors overriding ring fencing obligation light recent developments premium able demonstrate fsa full extent possible financial strength eml ring fenced financial problems encountered rest enron order make certain fulfil obligation changed way business ways discussed issues surrounding liquidity aware past week result reputation problems corporation faced substantially increased hands financial managerial oversight eml precaution knock problems causing liquidity issues eml clearly goal able feel absolutely certain financial standing eml fully completely ring fenced problems related non eml related problems enron course needed accomplished within framework continuing fully integrated enron company far shared services inter company commercial relationship concerned fsa regulate method regulated entity obtains distributes cash event cash lent outside eml must collateralised lc order preserve regulatory capital firm however firm number options preserve day day liquidity position lme broker eml must access cash two purposes first must able post margin london clearing house lch event liquidity ever prevented eml posting collateral lch would breach lch rules regulatory enforcement action could ensue addition would declared defaulter lch would right close positions second must able post margin clients failure make contractual payment client would likely result fsa action referred fsa third potential use cash make payments money clients event wish close account contractual right client cash mark market profits failure eml make payment would cause reputation questions previously believed small number potential scenarios might faced sufficient liquidity however certain significant components scenarios unfortunately come fruition amount cash maintained eml ring fencing rest enron become concern eml process losing 60 000 000 unsecured lc primarily used lieu cash lch eml use cash replace secure lc additionally number clients requested accounts transferred transfers reduced eml cash balance remaining 50 mm unsecured lc issued single bank withdrawn currently position immediately manage liquidity impact work done events past week highlighted need fully prepared foreseeable eventuality therefore agreed start following change way financing works maintain excess liquidity balance sheet rather provider liquidity rest enterprise b improve overall cash management function control well oversight direct responsibility eml personnel c manage business maximize liquidity within constraints continuing business normal basis obtain financial information much timely basis e periodically perform number analytical stress scenario tests certain continue sufficient internal liquidity f undertake formalize arrangements emgl provision additional liquidity whether unsecured subordinated senior basis liquidity insufficient run business normal basis operational risk theory eml could run small cash balance held accounts rely enron corp remaining portion day day cash needs eml board resistant practice several practical reasons first possible lch could unexpectedly call eml provide large amount collateral immediate basis eml relied enron corp daily wire transfer liquidity needs would danger either liquidity shortfall corp accounting administrative error somewhere system could trigger either capital liquidity events eml clearing account citibank would substantially overdrawn given likelihood lch fsa event might create cascade enron eml board reluctant put much faith 100 accuracy operational safeguards capital noted eml subject fsa regulatory capital rules must calculate financial resources daily basis fsa requires eml notify capital base less 110 minimum financial resources requirement variety reasons occasions eml violated 110 threshold occasions 2001 violations self contained easily remedied fsa take enforcement action eml instituted internal procedure whereby maintains financial resources excess 120 sufficient buffer trigger fsa notification requirement current climate fsa expressed concerns possible systemic risk might arise enron perceived financial weakness accordingly one violations occurred today fsa would likely commence formal investigation eml could issue order requiring eml cease trading light need reassure fsa light sizable changes eml cash position client positions occurring daily basis eml board attempting maintain regulatory capital level 130 clearly ability maintain sufficient liquidity excess capital adequacy go hand hand liquidity capital adequacy stress testing stress testing noted based following types scenarios would cause liquidity issues eml 1 changes market prices causing additional losses internal external clients either provide credit receive margin collateral rather cash resulting eml financing losses lch 2 changes market prices causing additional losses eml house account resulting eml financing losses lch 3 clients credit balances transferring balances lme brokers 4 withdrawal lch letters guaranty providing banks inability replace bank guaranty unsecured basis resulting cash placed either issuing bank lch directly 5 credit exposures leading credit losses recommendations result stress testing make us consider following changes way business addition trying increase overall operational liquidity 1 fully draw remaining 25 mm available 125 mm subordinated facility 2 monetize inter company marked market positions 20 mm 3 increase subordinated facility 175 mm extend maturity six months july 2002 4 monetize degree possible external marked market profits assets held eml 5 stop providing credit house enron counterparts switch either one way mutually margining zero low threshold calling margin 6 stop providing reduce amount credit clients select group key relationship clients 7 continue move large physical positions physical trading companies emcl emcc therefore shifting need inventory finance current situation unsecured guaranty 65 mm secured guaranty 15 mm subordinated loans 107 mm eml cash balance 59 mm cash required replace withdrawn guaranty 20 mm eml regulatory capital level 128 excess reg capital 110 30 mm conclusion attached financial analysis shows result initial stress testing analysis shows certain low probability sets circumstances would liquidity issues given possible eventualities would urge move forward points noted bold addition completing point f issues surrounding liquidity section