This post is about Front Arena but might as well be extended to any other system creating postings. Within the framework of FAccounting we have the periodic Accounting Instructions that we configure by setting the checkbox Periodic. These Accounting Instructions are used for accounting events that are repeated on a regular basis. This could be for example the booking of accruals on interest instruments or valuation bookings on positions that are periodically marked-to-market.

Once the checkbox is set the fields Reversal Method and Reversal Frequency become relevant. For the Reversal Method Front Arena supports only “Reverse and Replace” so the choice is simple. For the Reversal Frequency we have the choice between “Daily”, “Monthly”, “Weekly” and “Yearly”.

Certain postings just need to happen only once a year but apart from the choice between the other three is guided by the reporting frequency that one wants to achieve. It seems attractive to be able to determine PnL on a daily basis and for a trading book institute this may even be necessary. The Management would have very up-to-date information on the development of the trading positions and the profits and losses that are being accumulated. It can take necessary action quicker and ad-hoc reporting is easier since the necessary data is there. The choice for “Daily” seems to be a choice of whether one wants to be a modern bank or not.

However we also need to also consider the control steps that are necessary when postings are generated. When postings are generated automatically there need to be some controls that ensure completeness and accuracy. The FAccounting framework in Front Arena would always generate some postings but it would not tell you where it didn’t generate any or why. Logging could be expanded here but this is another topic. The point is that since we don’t get this information we need to set up controls for ourselves ensuring that:

  • everything that is supposed to be reversed out is indeed reversed out
  • everything that is supposed to be booked is indeed booked
  • the accounts are right (or at least there is nothing on the suspense account)
  • the quantities booked are right

These controls have to be set up around FAccounting in order to remain in control of what Front Arena is booking. Different reports based on Operations Manager (Trades, Journals) can be used for this but ultimately someone has to work with them and in case of inconsistencies investigate the reason.

The following screenshot shows the journals generated on a single day (30.04.2020) in a real bank setting.

This is not a particularly large institute but as you can see the number of journals is already close to 10,000. Periodic accounting instructions contribute the bulk of this since they are generated for all live trades. If postings are done daily, then the system would generate 10,000 new journals every day and (assuming not everything is Reverse and Replace) close to 10,000 reversal journals. One can easily lose track of what is going on and if we don’t have rock solid controls for what we should expect and what the system is booking we wouldn’t even notice that something has gone wrong. Even if we do notice the challenge to debug the cause becomes big. It will most likely be a few days after the problem and then it would be quite complicated to figure out on which day something went wrong. And before we know it the day will be over and another 20,000 journals will need to be checked.

This is why it may be smarter to choose a lower frequency in FAccounting even if this means that the accounting books will not be as up to date. FAccounting does offer an advanced and intuitive framework for automated postings but it still needs to be controlled and this can become a daunting task. In my projects I have developed reports to support controlling the journals produced but these reports have to be customized based on how FAccounting is set up. There is no one-size-fits-all solution.

As for the need to have a close control of PnL and position this can be covered by other more direct methods like generating reports from Trading Manager or some Data Warehouse fed with data from Front Arena.