Effective Product Control

PETER NASH is a qualified accountant who has spent almost two decades 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.

• Preface xiiiAcknowledgements xvAbout the Author xviiPART ONE Working in Product ControlCHAPTER 1 An Introduction to Product Control 3The Emergence of Product Control 3The Purpose of Product Control 3Different Types of Product Control 5Skills, Qualifications and Experience 6Organizational Structure 8The Desk 10CHAPTER 2 Changing Landscape of Product Control 15Offshoring 15XVA 19Greater Levels of Capital 19Greater Focus on Liquidity 20Notes 21CHAPTER 3 Key Stakeholders 23Front Office: Sales and Trading Desk 23Chief Operating Officers (COOs) 25Operations 26Middle Office 27Market Risk 28Financial Reporting 29Management Reporting 29Finance Change 30IT 30Operational Risk 32Regulatory Reporting 32Accounting Policy 34Tax 34Audit 36Finance Shared Service 37Summary 37Notes 37PART TWO Technical SkillsCHAPTER 4 Accounting Standards: Recognition and Measurement 41IAS 39 Financial Instruments: Recognition and Measurement 42IFRS 9: Financial Instruments 60IFRS 13: Fair Value Measurement 66Notes 71CHAPTER 5 Market Risk 75What Is Market Risk and How Is It Generated? 75How Is Market Risk Measured by a Bank? 77Note 85CHAPTER 6 Pricing Financial Instruments 87How to Approach the Pricing of a Financial Instrument 87Pricing Examples 89Notes 105CHAPTER 7 Internal Control 107What Is Internal Control? 107Establishing an Internal Control Framework 110Example of Front to Back Internal Controls 117Notes 122PART THREE Profit and Loss ControlsCHAPTER 8 System Feeds, End of Day Rates and Profit and Loss Estimates 127System Feeds 127End of Day 129End of Day Rates 130P&L Estimate 135Note 136CHAPTER 9 Review of New and Amended Trades 137New Trades 137Amended Trades 152Notes 164CHAPTER 10 Review of Mark-to-Market P&L 165Defining Mark-to-Market P&L 165Attributing MTM P&L 166Risk-Based P&L Estimates 170Changes in the End of Day Prices 173When to Validate the MTM P&L 176CHAPTER 11 Funding, Fees and Charges 177Funding 177Fees and Charges 185Note 187CHAPTER 12 Profit and Loss Adjustments 189The Need for P&L Adjustments 189Controlling P&L Adjustments 190Notes 194CHAPTER 13 Profit and Loss Commentary 195Who Is the Reader? 198When Is P&L Commentary Required? 198CHAPTER 14 Profit and Loss Reconciliations and Sign-Offs 201Flash vs. Actual 201Desk P&L Sign-off 203P&L Reconciliation 205PART FOURValuationsCHAPTER 15 Independent Price Verification 209Components to IPV Process 210Note 224CHAPTER 16 Valuation Adjustments 225Why Valuation Adjustments Are Required 225Bid–Offer 225Day 1 Reserves 234Model Valuation Adjustment 234XVA and Collateral Agreements 235Recording and Reporting of VAs 239Notes 239PART FIVE Balance Sheet ControlsCHAPTER 17 Balance Sheet Substantiation and Analysis 243Substantiating the Balance Sheet 243Frequency of the Balance Sheet Substantiation 248Evidencing the Balance Sheet Substantiation 249Unsupported Balances 249Lines of Responsibility 255CHAPTER 18 Dividending of Profit and Loss and FX Selldown 257CHAPTER 19 Controlling Nostros 261Introduction to Nostros 261Controlling Nostros – Cash Breaks 262Risk-Weighting Cash and AVE breaks 266Provisioning for Nostro and AVE Breaks 267Notes 268PART SIX Financial Accounting and ReportingCHAPTER 20 Financial Accounting Entries 271Financial Accounting Entries 271Chart of Accounts 284Accounting Rules Engine 286Notes 289CHAPTER 21 Financial Reporting and Note Disclosures 291Context of Financial Reporting 291Profit and Loss 293Balance Sheet 295Netting 297Fair Value Hierarchy 304Notes 309PART SEVEN Supplementary ControlsCHAPTER 22 New Product Proposals 313Starting Line 313The Review 314The Sign-Off 319CHAPTER 23 Rogue Trading 321The Forefathers of Rogue Trading 321The Fallout from Rogue Trading – The Bank 323The Fallout from Rogue Trading – The Industry 325Going Rogue 325UBS Rogue Trading Incident, 2011 327Notes 343Index 347