Effective Product Control E-Book

Peter Nash

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Series
• Sprache: Englisch

Seitenzahl: 545

Veröffentlichungsjahr: 2017

Beschreibung

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.   

Leseprobe

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For a list of available titles, visit our Web site at www.WileyFinance.com.

Effective Product Control

Controlling for Trading Desks

PETER NASH

This edition first published 2018© 2018 Peter Nash

Registered officeJohn Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom

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Library of Congress Cataloging-in-Publication Data

Names: Nash, Peter, author.Title: Effective product control : controlling for trading desks / by Peter Nash.Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2018. | Includes index. |Identifiers: LCCN 2017029434 (print) | LCCN 2017040992 (ebook) | ISBN 9781118939796 (Pdf) | ISBN 9781118939802 (epub) | ISBN 9781118939819 (cloth)Subjects: LCSH: Financial institutions—Risk management. | Financial services industry— Risk management. | Portfolio management. | Stocks. | Investments.Classification: LCC HG173 (ebook) | LCC HG173 .N27 2018 (print) | DDC 332.1068/1—dc23LC record available at https://lccn.loc.gov/2017029434

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-93981-9 (hardback)

ISBN 978-1-118-93979-6 (ePDF)

ISBN 978-1-118-93980-2 (ePub)

ISBN 978-1-118-93978-9 (obk)

Cover design: Wiley

Cover image: Top: ©Shai_Halud/Shutterstock, Bottom: ©Inozemtsev Konstantin/Shutterstock

I dedicate this book to my family, especially my children, who haveforgone a great deal of Dad time for this book to come to life.To Phoebe, Xani and Matilda.Thank you.

In memory of Patrick Spratt, a product controller and friendwho was larger than life.

Contents

Preface

Acknowledgements

About the Author

Part 1 Working in Product Control

CHAPTER 1 An Introduction to Product Control

The Emergence of Product Control

The Purpose of Product Control

Different Types of Product Control

Skills, Qualifications and Experience

Organizational Structure

The Desk

CHAPTER 2 Changing Landscape of Product Control

Offshoring

XVA

Greater Levels of Capital

Greater Focus on Liquidity

Notes

CHAPTER 3 Key Stakeholders

Front Office: Sales and Trading Desk

Chief Operating Officers (COOs)

Operations

Middle Office

Market Risk

Financial Reporting

Management Reporting

Finance Change

IT

Operational Risk

Regulatory Reporting

Accounting Policy

Tax

Audit

Finance Shared Service

Summary

Notes

Part 2 Technical Skills

CHAPTER 4 Accounting Standards: Recognition and Measurement

IAS 39 Financial Instruments: Recognition and Measurement

IFRS 9: Financial Instruments

IFRS 13: Fair Value Measurement

Notes

CHAPTER 5 Market Risk

What Is Market Risk and How Is It Generated?

How Is Market Risk Measured by a Bank?

Notes

CHAPTER 6 Pricing Financial Instruments

How to Approach the Pricing of a Financial Instrument

Pricing examples

Notes

CHAPTER 7 Internal Control

What is Internal Control?

Establishing an Internal Control Framework

Example of Front to Back Internal Controls

Notes

Part 3 Profit and Loss Controls

CHAPTER 8 System Feeds, End of Day Rates and Profit and Loss Estimates

System Feeds

End of Day

End of Day Rates

P&L Estimate

Notes

CHAPTER 9 Review of New and Amended Trades

New Trades

Amended Trades

Notes

CHAPTER 10 Review of Mark-to-Market P&L

Defining Mark-to-Market P&L

Attributing MTM P&L

Risk-Based P&L estimates

Changes in the End of Day Prices

When to Validate the MTM P&L

CHAPTER 11 Funding, Fees and Charges

Funding

Fees and Charges

Notes

CHAPTER 12 Profit and Loss Adjustments

The Need for P&L Adjustments

Controlling P&L Adjustments

Notes

CHAPTER 13 Profit and Loss Commentary

Who Is the Reader?

When Is P&L Commentary Required?

CHAPTER 14 Profit and Loss Reconciliations and Sign-Offs

Flash vs. Actual

Desk P&L Sign-off

P&L Reconciliation

Part 4 Valuations

CHAPTER 15 Independent Price Verification

Components to IPV Process

Notes

CHAPTER 16 Valuation Adjustments

Why Valuation Adjustments Are Required

Bid–Offer

Day 1 Reserves

Model Valuation Adjustment

XVA and Collateral Agreements

Recording and Reporting of VAs

Notes

Part 5 Balance Sheet Controls

CHAPTER 17 Balance Sheet Substantiation and Analysis

Substantiating the Balance Sheet

Frequency of the Balance Sheet Substantiation

Evidencing the Balance Sheet Substantiation

Unsupported Balances

Lines of Responsibility

CHAPTER 18 Dividending of Profit and Loss and FX Selldown

CHAPTER 19 Controlling Nostros

Introduction to Nostros

Controlling Nostros – Cash Breaks

Risk-Weighting Cash and AVE breaks

Provisioning for Nostro and AVE Breaks

Notes

Part 6 Financial Accounting and Reporting

CHAPTER 20 Financial Accounting Entries

Financial Accounting Entries

Chart of Accounts

Accounting Rules Engine

Notes

CHAPTER 21 Financial Reporting and Note Disclosures

Context of Financial Reporting

Profit and Loss

Balance Sheet

Netting

Fair Value Hierarchy

Notes

Part 7 Supplementary Controls

CHAPTER 22 New Product Proposals

Starting Line

The Review

The Sign-Off

CHAPTER 23 Rogue Trading

The Forefathers of Rogue Trading

The Fallout from Rogue Trading – The Bank

The Fallout from Rogue Trading – The Industry

Going Rogue

UBS Rogue Trading Incident, 2011

Notes

Index

EULA

List of Tables

Chapter 1

Table 1.1

Chapter 3

Table 3.1

Table 3.2

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Table 4.6

Table 4.7

Table 4.8

Table 4.9

Table 4.10

Table 4.11

Table 4.12

Table 4.13

Table 4.14

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Table 5.6

Table 5.7

Table 5.8

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Table 6.5

Table 6.6

Table 6.7

Table 6.8

Table 6.9

Table 6.10

Table 6.11

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Chapter 8

Table 8.1

Table 8.2

Chapter 9

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 9.5

Table 9.6

Table 9.7

Table 9.8

Table 9.9

Table 9.10

Table 9.11

Table 9.12

Table 9.13

Table 9.14

Table 9.15

Table 9.16

Table 9.17

Table 9.18

Chapter 10

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Chapter 11

Table 11.1

Table 11.2

Table 11.3

Table 11.4

Table 11.5

Table 11.6

Chapter 12

Table 12.1

Table 12.2

Table 12.3

Chapter 13

Table 13.1

Table 13.2

Table 13.3

Table 13.4

Chapter 14

Table 14.1

Table 14.2

Table 14.3

Table 14.4

Chapter 15

Table 15.1

Table 15.2

Table 15.3

Table 15.4

Table 15.5

Table 15.6

Table 15.7

Table 15.8

Chapter 16

Table 16.1

Table 16.2

Table 16.3

Table 16.4

Table 16.5

Table 16.6

Table 16.7

Table 16.8

Table 16.9

Table 16.10

Chapter 17

Table 17.1

Table 17.2

Table 17.3

Table 17.4

Table 17.5

Table 17.6

Table 17.7

Table 17.8

Table 17.9

Chapter 18

Table 18.1

Table 18.2

Chapter 19

Table 19.1

Table 19.2

Table 19.3

Table 19.4

Chapter 20

Table 20.1

Table 20.2

Table 20.3

Table 20.4

Table 20.5

Table 20.6

Table 20.7

Table 20.8

Table 20.9

Table 20.10

Table 20.11

Table 20.12

Table 20.13

Table 20.14

Table 20.15

Table 20.16

Table 20.17

Table 20.18

Table 20.19

Table 20.20

Table 20.21

Table 20.22

Table 20.23

Table 20.24

Chapter 21

Table 21.1

Table 21.2

Table 21.3

Table 21.4

Table 21.5

Table 21.6

Table 21.7

Table 21.8

Table 21.9

Table 21.10

Table 21.11

Table 21.12

Table 21.13

Table 21.14

Table 21.15

Table 21.16

Table 21.17

Table 21.18

Table 21.19

Chapter 22

Table 22.1

Table 22.2

Table 22.3

Chapter 23

Table 23.1

Table 23.2

List of Illustrations

Chapter 1

Figure 1.1

The purpose of product control

Figure 1.2

The P&L

Figure 1.3

Finance and product control organizational structure

Figure 1.4

Remit of valuation control

Figure 1.5

The foreign exchange market operating hours

Figure 1.6

World stock market operating hours

Figure 1.7

Sir Alex Ferguson brokering trades for charity in London

Chapter 2

Figure 2.1

Changes in product control

Figure 2.2

Offshoring models

Figure 2.3

The impact of increased capital

Chapter 3

Figure 3.1

Stakeholder interaction with product control

Figure 3.2

The role of operations

Figure 3.3

Sparta Bank FX One Name Trading (Single book)

Chapter 4

Figure 4.1

Overview of IAS 39

Figure 4.2

Derecognizing an asset

Figure 4.3

Repurchase agreement

Figure 4.4

Aspects of control within a transfer

Figure 4.5

IAS 39's classification and measurement of financial assets

Figure 4.6

Classification and measurement of financial liabilities under IAS 39

Figure 4.7

U.S. GAAP classification and measurement

Figure 4.8

U.S. GAAP classification and measurement

Figure 4.9

Recording the impairment of AFS and held to maturity assets

Figure 4.10

IFRS 9: classification and measurement for financial assets

Figure 4.11

Establishing the type of business model

Figure 4.12

IFRS 9: interest components

Figure 4.13

IFRS 9 – Fair value through P&L

Figure 4.14

IFRS 9: Impairment

Figure 4.15

Bid and Ask quotes for spot FX rates

Figure 4.16

IFRS 13: Determining fair value

Chapter 5

Figure 5.1

Generating and laying off market risk

Figure 5.2

Pricing, market risk and P&L

Figure 5.3

Consolidating interest rate risk

Figure 5.4

Market risk arising from a FRA

Figure 5.5

Interest rate risk for an interest rate swap

Figure 5.6

The standard deviation of P&L scores

Chapter 6

Figure 6.1

Approach to pricing a financial instrument

Figure 6.2

Spot FX trade

Figure 6.3

Spot FX quotes in the market

Figure 6.4

FX forward trade

Figure 6.5

GBP/USD FX forward rate

Figure 6.6

Bond cash flows

Figure 6.7

Interest rate swap

Figure 6.8

U.S. swaps curve

Figure 6.9

AUD/USD FX volatility

Figure 6.10

The payoff for a long AUD/USD call option

Chapter 7

Figure 7.1

COSO Integrated Control Framework

Figure 7.2

Objectives and internal control

Figure 7.3

Establishing a risk culture and risk management framework

Figure 7.4

Lines of defence

Figure 7.5

Four lines of defence

Figure 7.6

Front to back controls

Chapter 8

Figure 8.1

Optimal controls over the P&L

Figure 8.2

Decomposing or attributing the P&L

Figure 8.3

Alternative P&L reporting feeds

Figure 8.4

Supply of data and checks to product control

Figure 8.5

Sourcing end of day rates

Figure 8.6

SuperDerivatives pricing service

Figure 8.7

External rate checks

Figure 8.8

Checking trader marks

Chapter 9

Figure 9.1

Drivers of new trades

Figure 9.2

Drivers of new trades

Figure 9.3

Steps in the new trade process

Figure 9.4

New trade threshold criteria

Figure 9.5

New trade threshold criteria

Figure 9.6

Intraday GBP/USD Spot FX prices

Figure 9.7

Considerations in a new trade review

Figure 9.8

Client transaction

Figure 9.9

Crossing the bid–offer to hedge risk

Figure 9.10

Transaction price now incorporates the cost of crossing the bid–offer

Figure 9.11

Transaction price now incorporates bid–offer, margin and CVA

Figure 9.12

Transaction price now incorporates bid–offer, margin, CVA and FVA

Figure 9.13

Selling CDS protection to a client

Figure 9.14

P&L from amended trades

Figure 9.15

HSBC Share price

Figure 9.16

P&L reporting of a close out

Figure 9.17

Novation of an interest rate swap

Figure 9.18

CME Group acting as a central clearing counterparty

Figure 9.19

Overview of MarkitServ's process

Figure 9.20

Avoidable amendments

Chapter 10

Figure 10.1

Defining MTM P&L

Figure 10.2

Validating MTM P&L

Figure 10.3

Driver of MTM P&L

Figure 10.4

Using the waterfall method to sub-attribute an FX option's MTM P&L

Figure 10.5

Using the restored method to attribute an FX option's MTM P&L

Figure 10.6

Quantifying a risk-based P&L estimate

Figure 10.7

Fixings vs risk based P&L estimate

Figure 10.8

U.S. markets in Bloomberg

Figure 10.9

AUD/USD price changes

Chapter 11

Figure 11.1

Drivers of funding

Figure 11.2

Sourcing funding

Figure 11.3

Funding a bond purchase

Figure 11.4

Funding P&L

Figure 11.5

Above and below the line expenses

Chapter 13

Figure 13.1

P&L commentary segments

Figure 13.2

Intraday MTM P&L

Chapter 14

Figure 14.1

P&L sign off

Figure 14.2

Approaches to P&L reporting and the impact on reconciliations

Figure 14.3

Establishing P&L variance thresholds

Chapter 15

Figure 15.1

P&L smoothing

Figure 15.2

IPV process

Figure 15.3

Price discovery hierarchy

Figure 15.4

Cross currency basis

Figure 15.5

Stock prices

Figure 15.6

World corporate bond prices

Figure 15.7

Outright GBP volatilities by delta

Figure 15.8

Spot FX rates

Figure 15.9

GBPUSD FX forward points

Figure 15.10

Transocean 5-yr Senior CDS quote

Chapter 16

Figure 16.1

Aligning valuations to their exit price

Figure 16.2

Crossing the bid–offer spread

Figure 16.3

Differences in bid–offer spreads by tenor

Figure 16.4

Volatile market

Figure 16.5

Stable market

Figure 16.6

Rates desk risk aggregation

Figure 16.7

Back-to-back interest rate swap

Figure 16.8

FCA on a back-to-back interest rate swap

Chapter 17

Figure 17.1

Substantiating the GL

Chapter 18

Figure 18.1

Overview of dividending, FX selldown and repatriation of P&L

Figure 18.2

In non-selldown centres, foreign currency P&L is transferred to the FX position accounts

Chapter 19

Figure 19.1

Nostro record keeping

Figure 19.2

Ledger and statement entries

Figure 19.3

TLM reconciliation workflow

Figure 19.4

TLM cash reconciliation dashboard

Figure 19.5

Cash break identification

Figure 19.6

Cash break transfer to the credit desk

Chapter 20

Figure 20.1

A trial balance report

Figure 20.2

Loan agreement

Figure 20.3

Cash flows for $1m Muster Inc. 10% S/A bond

Figure 20.4

Accounting for an interest rate swap

Figure 20.5

Accounting for an FX forward

Figure 20.6

Accounting rules engine flows

Chapter 21

Figure 21.1

Different paradigms

Figure 21.2

Netting – a summary of IAS 32’s criteria

Figure 21.3

Fair value hierarchy

Figure 21.4

FVH decision tree

Chapter 23

Figure 23.1

Rogue trading events

Figure 23.2

Repercussions of rogue trading

Figure 23.3

NAB capital increase post rogue trading

Figure 23.4

Control weakness at UBS not remediated post rogue trading review in 2008

Figure 23.5

UBS Organizational structure

Figure 23.6

EURO STOXX 50 and S&P 500 price history

Figure 23.7

Concealment mechanisms used by the rogue trader

Figure 23.8

SCP alerts

Figure 23.9

Late trades

Figure 23.10

Deferred settlements

Figure 23.11

P&L smoothing using fee tickets

Figure 23.12

Summary of control weaknesses

Figure 23.13

Consolidated lens

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Preface

In 2003 I was working in a Dutch bank in a high rise overlooking the picturesque Sydney Harbour, when another junior external auditor sat beside me to review my work. This was the third new auditor in as many years and as they struggled to grasp what it was I did as a job, their lack of understanding generated in me mixed feelings of frustration and empathy for the person.

Their lack of knowledge wasn't their fault; product control is difficult to understand for an outsider and sending junior staff in to test controls is the model many audit firms use to carry out their audit assignments. Nevertheless, that exchange generated an idea to help close the gap between new auditors and product controllers and their more experienced colleagues.

Over the past 14 years I continued to work in product control in both Sydney and London, developing more experience, skills and friendships, which together have finally made possible the writing and publication of this book.

Due to the large numbers of sales and trading teams within banks, they remain the largest employer of product controllers. We will, therefore, aim the narrative of the book towards banks, but the content can also be applied to other contexts in which product control operates, such as hedge funds and corporate treasuries.

Whether you are embarking on your career or have years of experience in the field, this book will equip you with the building blocks necessary to be an effective product controller or effective in your review of product control. These building blocks cover both the core technical skills required in product control and the primary controls which product control are responsible for.

My hope is that through reading this book, your career is enhanced and more opportunities are afforded to you and your family.

Peter Nash

Acknowledgements

Special thanks to Robert Phillips who encouraged me and helped develop the manuscript from its infancy.

Thank you also to the following people and organisations who have contributed to the content of this book:

Dooshyant Beekarry, Nico Botha, Paul Bradley, Paul Buchanan, Clive Budd, Matthew Burbedge, James Campbell, Lisa Chuilon (nee Able), James Clarke, CME, Brighton Cohen, COSO, Christine Cossor, Brent Davies, Delphi Derivatives, Kane Erickson, FCA, FINMA, Fitzgerald Jenkins Recruitment, Chad Foyn, Paul Galpin, Darren Gordois, Chris Harvell, James Hayden, Michael Hoppe, ICE, Sanjiv Ingle, Investing.com, Tim Jenkins, Steve Kelley, Thusitha Liyanage, Markit, Harkil Maru, Ruairi McHale, Denley Mirabueno, Mondrian Alpha Recruitment, Grant Moscowitz, Richard O'Flynn, Daniel Pass, Mark Proctor, SmartStream, Ben Tallentire, Thomson Reuters, TriOptima, TOM Recruitment, Treasury Services, Darren Wadhera, Peter Walsh, Ben Weekes, Matthew Wiles, Mark Williams and Keith Young.

Finally, thank you to my past managers who have shared their knowledge and experience throughout my career:

Scott Rissman, Ben Weekes, Geoff Simmonds, Callum Winchester, Craig Townsend, Sandy Coxon, Peter Roberts, Robert Phillips, Ron Antonelli, Diana Neo, Prash Patel, Pascal Loup, James Howard, Stephen Chippendale, Chad Foyn, Oliver Gee, Rob Jones, James Campbell, Ryan Evans, Nathan Harris and Kane Erickson.

About the Author

Peter Nash is a qualified accountant who has spent almost two decades working in Product Control, controlling a wide range of sales and trading desks in Investment and Commercial banks. He is currently a director of FINSED (www.finsed.com), a financial services training and consulting firm specialising in Product Control.

Part 1Working 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.