Effective Product Control

Controlling for Trading Desks

Peter Nash

• Publisher: Wiley
• Year: 2017
• ISBN:
  9781118939802
• Edition: 1
• Topic: Business
• Subtopic: Corporate Finance
• Index: Business

Improve the Effectiveness of your Product Control Function

Effective Product Control is a detailed how-to guide covering everything you need to know about the function. Considered essential reading for:

• New controllers entering the profession
• Auditors and regulators reviewing product control
• Established controllers wanting a refresher on the latest skills and core controls within the industry.

Encompassing both a technical skills primer and key insights into core controls used to mit­igate major risks emanating from trading desks, you will get expert advice on practical topics such as:

• The key IFRS and U.S. GAAP accounting standards for a trading desk
• How to approach the pricing of a financial instrument
• Market risk and how is it quantified
• The controls necessary for a trading desk
• Rogue trading and how it can be detected
• Valuation adjustments and why they are necessary
• How the prices used to value a trading portfolio are independently verified
• The financial accounting entries used to record financial instruments in the balance sheet and profit & loss statement
• Financial reporting and how the results of a trading desk are presented
• How a new financial product can be introduced in a controlled manner

Complete with a wealth of insightful graphs, illustrations and real-world examples to enliven the covered material, the dependable answers you need are in Effective Product Control.

Part 1
Working in Product Control

The opening part of this book provides an introduction to what it's like to work in product control, beginning with a review of product control's emergence as a significant control function, before considering its purpose and the environment within which it operates. The book will then go on to explore the skills and experience required and consider what changes have impacted the function over the past decade.

CHAPTER 1
An Introduction to Product Control

The Emergence of Product Control

Finance within banking is unlike finance in most other types of industries. In most non-banking companies, the finance team is separate from the producer. For example, in a manufacturing company the finance department is not on the shop floor, and in a retail company it is not in the stores. Most likely, finance is housed in the head office.

In these industries, the value of the product is not often in dispute. Usually the cost of sales and production, or margin per unit, is known and the revenues are the function of a simple calculation. There is also often a team of management accountants providing information to the product line managers on the results of their business and assisting in analytics on those results.

In banking, it is not that simple. Finance is more integral to the production because the products banks deliver are financial. In the 1990s, with increasing volumes of trading, a greater pool of financial instruments and higher levels of complexity, it was necessary for banks to establish a dedicated function within finance to control evolving sales and trading desks. With that, management accountants within finance morphed and grew into a function called product control, which came to dominate large swathes of finance, establishing footprints all over the developed world and later on, the developing world.

Over the past decade, these large swathes have been migrating from the more expensive financial centres such as London, New York, Tokyo, Hong Kong and Singapore, to cheaper locations such as India, Poland and the Philippines. This change has presented opportunities for aspiring workers in the developing nations and presented uncertain career paths for those remaining in the shrinking financial centres.

We will look at this trend in more detail in Chapter 2.

The Purpose of Product Control

Product control is the face of finance to the sales and trading desks in a bank. They provide financial control and transparency through (Figure Figure 1.1):

• Providing a profit and loss statement and balance sheet which is accurate and timely;
• Providing meaningful insight into the desk's financial results;
• Supporting the desk in the execution of their business strategy; and
• Evaluating and integrating new products into the financial environment.

Product control's purpose is executed through a series of controls across the P&L and balance sheet, many of which are performed daily. On top of these controls, product control's financial acumen and understanding of the bank's systems can be used to support the execution of the desk's business strategy. This includes providing insight into drivers of financial performance, reviewing the desk's use of legal entities within the banking group and assessing the efficiency of process workflows.

Figure 1.1 The purpose of product control

The centrepiece of the product control role is the daily P&L (Figure 1.2). If you aren't familiar with this term, it measures the income and expenses for the sales and trading desks. If the sum of the income from trading activities, client sales and trading expenses is greater than zero, a profit is reported, otherwise a loss is reported.

Figure 1.2 The P&L

We will explore the controls that product control normally execute in greater detail throughout Parts III through VII of the book.

Different Types of Product Control

Before we can explore the role of product control further we need to be aware that not every organization will share the same mandate for their product control function. Although there will be exceptions to this, we can broadly categorize the function into one of two types:

1. P&L only
2. P&L, balance sheet and financial reporting.

P&L Only

The P&L-focused role is, as its name suggests, focused purely on the P&L. In firms across the industry this function may also be labelled as middle office. The review and substantiation of the balance sheet and financial reports are performed by a separate team(s) within finance.

There are benefits and drawbacks for any organizational structure. There are two main benefits to this model. First, it relies on a team with a narrower skill set, which can improve the control framework as the product controller does not have to be an expert in an excessive number of disciplines (accounting, risk management, financial reporting, etc.). Second, as the skill set is narrower it should be easier for the firm to hire and develop their talent.

The primary but manageable drawback to this structure is that a single team is not controlling all the financial aspects of the desk and weakness in...