Banking Industry - Product Control (PC) Functionalities

Product Control (PC) for Legal Entities in Investment Banks:

Product Control Role:

Product Control department acts as an independent control department, primarily as name suggests is a Control Function found in Financial Institutions, such as in Investment Banks, Hedge Funds, Wealth Management and Asset Management Firms. 

It acts to ensure the integrity of an organization’s financial statements through preparation and independent verification of daily and monthly P&L, balance sheet reconciliation and substantiation, and valuation testing of trading inventory.

Associated Departments:

In Product Control department, product controller works in close contact with the front office and its traders, risk and valuation units, and have exposure to investment banking products (whether vanilla / flow products or more complex structured / exotic products), allowing to understand why and how a bank trades on a daily basis.

Product Control Mid Office:

Product Control can be considered as Middle Office or a Back Office function as opposed to Trading divisions i.e. Front Office, and thus a lot of people take pride that they are joining investment bank, that has to be tempered with a bit of reality that ok, you will be supporting the front office, but yes you are an independent control department within my domain that you will ensure that the PNL which the trader reports that is true and fair. 

It is a MID office or a back office, so let it be very clear that product controller are not a traders who is in the front office. The front office normally is a Singapore or a New York office of let's say Goldman Sachs and you are in the mid office or a back office function in Goldman Sachs Bangalore.

Key Interactions:

Product controller key interactions are typically with the trading desk head and traders within the bank, the central product control team, and the middle office, operations and technology divisions. So, the role provides a real insight into how a bank operates on a day-to-day basis. These interactions include a whole range of daily, weekly and monthly reporting communications, various project work and specific ad hoc queries.

The below example is mentioned in order to understand PC work nature: 

Suppose for any financial year consider a particular legal entity in Investments Bank reported 46% more profit. PC's part of work is to analyze - What exactly was the underlying reason for unusual increase in profit? Are the Interest rates moved up or down and like was the legal entity on the right side of the swing, etc. such reasons are required to be determined by product control department as a prerequisite. PC does price verification on all financial and accounting matters related to the business the related products and structures and analyses reasons for fluctuations these are main functions of PC. PC are like the good cop in the system. 

Product Control responsibilities and obligations:

PC are responsible for controlling risks that banks faces in open market, so that there is no or minimum operational risk in the system of the banks and banks larger risk management policies, as if the trader is taking undue risk the value at risk triggers are being short, PC department are oblige to flog it off and say, Sir (trader), you breached your limits you cannot take more risk. So exactly PC are like a second line of defense for the investment banks similar to the audit function. 

PC do not follow a trading rule, rather it takes compliance related decisions for the trading desk, ensuring that whatever the trading desk does is, it should be within the firm's policy. So one trader in a London office cannot take undue risk and PC suddenly finds that the company has lost $100 million out of it. So Product Controller ensures that risk is within acceptable limits within the firm's policy. PC are the sole owner of the PNL revenue audit and control, and to understand how much does bank makes profit product-wise.   

Understanding the business chain:

Stakeholders are basically the trading desk head and the traders within the bank. Thus PC are central product control team and mid office working with the technology and observation. So PC essentially understand that entire value chain of the trading, how the bank operates on a day to day basis across its global offices. 

So what exactly is this PC will interact with trading, PC are finalizing their PNL, PC could support a huge variety of products such as Fixed income, exotic, plain Vanila equity, etc. with a very good chance to get an idea of the different trading strategies in the legal entity as all the trades that are happening such as Call, Put, Butterflies strategies, Straddles, whatever trades there may be PC are really in the deep detailed knowledge of the products.

For Eg. Convertible Bonds PC know exactly all the parameters that go in the valuation of the convertible bond at the month end, such as what is parity price? the conversion ratio at the end of the five years? the exercise price? everything PC knows. Then the weekly, quarterly PnL analysis their variances and how the market is moving and how the traders are performing. 

Binding decisions between Traders and Product Control:

If traders cannot prove mark up of profit in trade then PC will take them mark down. The product control reserves the PnL and does not report a markup of profit unless it is convinced, that's the power PC team has. PC team will interact with various teams, in order to understand the entire trade cycle, PC will reconcile the upstream PNL with what is reported downstream. 

Valuation Reserves are PC domain as PC are the owners of valuation reserves. So if PC are saying to the trader that ok, PC will mark this Bond down to $95 instead of $100 face value, because it is illiquid, there is no consensus, there's a difference in bid offer, PC have to take a call irrespective of whether the trader agrees or not, PC have to ensure the sanctity of the banks financial statements. So PC will perform the price verification function at the month end challenge.

So at the bank level, whatever is it, trading income that PC are Reporting, does that get aggregated by the individual PnL items i.e. there may be some reconciliation differences between traders and PC in terms of trades that may be reported, those need to be investigated by keeping good relations between traders and PC by understanding views and discussing strategies. PC controller learns a lot about trading by questioning traders and understanding strategies, risks and valuations of various products.

PC can ask questions to traders regarding trades that are performed such as is there something which is undervalued? Is there something which is over valued? or if there is a risk which is not being managed properly or they not hedging forex? so suppose if that market makers they're not supposed to hold inventory, whatever position they have, they should offset that immediately. PC are going to go to the trader and question adherence to the policy.

Importance:

"The product control function is incredibly important at the moment as banks seek to scrutinize trading activity and mitigate risks. As a result, the number of roles in this area has increased recently and product controllers are highly sought-after".