Funding

When a trading desk buys a security, it requires funding. Often, funding is provided
by the bank’s treasury desk. In this case, it is usually not possible to match up
funding positions to trading positions or even identify which funding positions belong
to each trading desk. Sometimes, funding costs are not calculated daily, but a
monthly average cost of funding is given. In this case, daily P&L is biased upwards
if the trading desk overall requires funds, and this is corrected by a charge for
funding at the month end. For backtesting, daily funding costs should be included
with daily P&L figures. The monthly funding charge could be distributed retrospectively.
However, this would not give an accurate picture of when funding was actually
required. Also, it would lead to a delay in reporting backtesting exceptions that would
be unacceptable to some regulators.