to place greater emphasis on a bank's liquid assets and their funding profile. In Basel III, the BIS introduced two requirements:
1. Liquidity Coverage Ratio (LCR)
“The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario. The LCR will improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.”4
2. Net Stable Funding Ratio (NSFR)
The objective of the NSFR is to “promote resilience over a long time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The NSFR…supplements the LCR and has a time horizon of one year. It has been developed to provide a sustainable maturity structure of assets and liabilities.”5
The function responsible for maintaining the appropriate levels of liquidity is treasury. To influence better funding behaviour by the trading desks, treasury started to penalize trading desks who were funding themselves ineffectively; for example, buying a 2-year corporate bond and funding that purchase using an overnight loan from treasury, which is known as a tenor mismatch. Conversely, the trading desk could be rewarded if they were overfunding their assets, as this excess term funding could be used to provide funding to other business. For example, borrowing $100 million for two years to fund the purchase of $90 million two-year government bonds.
As product control reports the financial impact of these penalties and rewards in the P&L, the business relied on product control to identify which positions (assets and liabilities) were driving these P&L entries. For product control to assist the business they needed to understand the business' balance sheet, specifically the size and tenor of the asset and liabilities, and how treasury viewed this construction from their funding paradigm.
CHAPTER 3
Key Stakeholders
In the performance of their role, product control interact with numerous functions, each of which vary regarding their importance and frequency with which they interact. This chapter will introduce you to those functions which product control most commonly interact with.
Figure 3.1 illustrates the typical levels of interaction Product Control will have with each function.
Figure 3.1 Stakeholder interaction with product control
Front Office: Sales and Trading Desk
The front office staff have three main objectives:
1. Provide the bank's clients with a suite of products to meet their investment and risk management needs.
2. Risk manage the bank's market and credit risk exposures to safeguard the bank from adverse market movements.
3. Participate in risk-taking (proprietary trading) to generate profits for the bank.
The front office are the most significant stakeholder who product control interact with. In most banks they are considered a client of product control whilst also being a function that product control must monitor and control. There is also a high level of interdependency between the two functions as the front office have a large vested interest in ensuring the P&L accurately reflects their performance.
The front office rely primarily on product control for the following:
• The provision of a daily P&L.
• The reconciliation of this P&L to the desk's P&L estimate (T+0 flash).
• The provision of a new trades report (as valued by the finance systems).
• The analysis of internal charges allocated to the desk and assistance in minimizing those charges.
• Ensuring their foreign currency P&L is sold down correctly at month-end.
• Assistance with the set-up of new traders and sales staff in the bank's systems (e.g., new trading books).
• Assistance and advice when new products are implemented.
• Advice regarding the adoption of new accounting standards.
• The production of balance sheet reports and insight into the drivers of their balance sheet usage.
Product control also rely on the front office to perform their role effectively, which includes:
• Educating product control on the strategy of the desk.
• Providing insight into the markets which the desk are active in.
• Providing a T+0 flash.
• Approving the P&L.
• Explanation of exceptional day one and mark-to-market (MTM) P&L.
• Ensuring the risk management system (RMS) captures all the desk's trades.
• All trades are being valued correctly (includes both end of day marks and models).
Chief Operating Officers (COOs)
Chief operating officers (COOs), also known as business managers, assist the business in executing its strategy. Practically, this function brings together all the support functions in the end-to-end delivery of the business' products and services. Given this, product control will have a significant level of interaction with this function.
The COO can either report directly to the head of the business or to a global COO. For example, the ratesCOO could either report into the global head of the rates business or they could report into the global markets COO along with all the other COO's (e.g., credit, commodities, etc.).
The following describe some of the main functions COOs perform to fulfil their mandate.
System Infrastructure
COOs will assist the business by establishing and maintaining the necessary system infrastructure to continue trading and marketing existing products as well as establishing new products. Their functions are, for example, to:
• Monitor system performance and follow up on the remediation of issues such as system failures or delays, which could impact the desk.
• Provide the desk with the necessary system access to book trades, monitor risk and so on.
• Create new books or portfolios so that trades can be recorded in the bank's systems.
• Request new nostros (bank accounts) to enable the firm to settle transactions executed by the desk.
Onboarding New Products
When the business decide they want to trade or market a new product, the COO will launch new product
Bank for International Settlements (BIS). Basel Committee on Banking Supervision, “Basel III: Liquidity The Liquidity Coverage Ratio and liquidity risk monitoring tools,” January 2013, Introduction. http://www.bis.org/publ/bcbs238.pdf.
Ibid.
