being the subject matter expert, or at the very least the point person that support functions can turn to for answers to any questions they have regarding the proposal.
Daily Operational Effectiveness
The COO monitors the key performance indicators (KPIs), which are a measure of how well the desk is performing operationally. The purpose of these collective checks is to gauge the level of operational risk that the desk are running. By reviewing multiple indicators, the COO can make a more informed assessment of this risk.
These KPIs will usually assess the following factors:
• Trade booking accuracy (late trades and trade amendments).
• Timely and accurate T+0 Flash (no late, missing or inaccurate estimates).
• Timely and complete P&L and risk report sign-offs.
• Complete and accurate end of day remarking.
• That the desk are trading within their product and risk mandate.
• The size, number and age of P&L adjustments.
• The size, number and age of cash breaks.
• The number and age of missing trade confirmations.
Forecasted Revenues, Costs, and Balance Sheet
The desk have targets for revenues, costs and balance-sheet usage. The COO will assist in developing these limits. Once created they will monitor the desk's relative performance against these levels.
Operational Risk Incident (ORI)
An ORI is simply an event where the control framework has failed. A bank will have risk and financial thresholds which will determine whether an ORI has taken place. When there is an ORI, the COO will involve themselves in the write-up of the event and assist in rolling out any key recommendations published by the operational risk team.
Implement Firm-Wide Changes
Often within banks, especially investment banks, the organization's structure can be changed in the hope that this brings with it higher operating profits. It is the COO who assists the desk in managing this change.
For example, the firm's senior management have decided to exit their structured-rates business; however, it is expected to take some time to exit all positions. To manage this effectively the firm has decided to create a legacy business unit. The structured rates desk will move from their current business unit into the legacy business unit. With this change comes the migration of all the static data (profit centres, trading books and any other organizational nodes), trades, P&L, balance sheet, costs and plans relating to structured rates. This change may sound simple but operationally it can be very difficult to execute.
Operations
Operations are primarily responsible for confirming and settling transactions the business undertakes. Specifically, operations will carry out the following tasks illustrated in Figure 3.2.
Figure 3.2 The role of operations
Through these activities, operations are ensuring that the following activities occur:
• Executed trades are captured in the bank's systems
• Trades within the bank's systems are legally agreed with counterparties (confirmations)
• Cash flows and securities exchanges between counterparties are settled (cleared)
• Trades which fail to settle are identified and managed
• Trade life cycle events are executed correctly, for example corporate actions (e.g., share splits, dividends) and trade fixings (e.g., LIBOR, HSRA).
s operations are a cornerstone of the control framework, product control rely quite heavily on them for information regarding:
• Cash and security settlement issues, including outright and timing breaks that affect the nostro and security accounts
• Outstanding trade confirmations
• Failed trades (where settlement has not occurred)
• Trade event reports, for example, the trades involved in a tri-party compression exercise
• Fees and charges incurred, for example, brokerage and exchange fees.
By having this information, product control can report the desk's P&L and balance sheet more accurately.
Middle Office
Middle office does not exist within every bank and, if it does, their roles and responsibilities will not be consistent across the industry.
As we touched on earlier in the book, product control can also be situated within middle office, but for the purposes of this chapter, we will cover those middle office tasks where product control are located within finance.
Middle office are closely aligned with the desk as they are responsible for:
• Trade bookings on behalf of the desk.
• Effecting the daily fixings for indices such as LIBOR.
• Saving down into the RMS (or equivalent) the desk's end of day marks which will be used to revalue their portfolio.
Product control rely on middle office for:
• Information on new and amended trade bookings, particularly those which generate significant day one P&L.
Market Risk
Market risk is the risk that the desk's portfolio will rise or fall in value due to changes in market prices, which can lead to either profits or losses for the bank. As a bank wants to limit the losses incurred from market fluctuations, they will set an overall market risk limit for the group at board level. These group-level limits are then transformed into smaller business- and desk-level limits, which are applied across the various trading desks. Limits cover such things as:
• Maximum loss for moves in interest rates, foreign exchange rates, credit spreads or volatilities.
• Concentration limits on exposures in various maturities or even various countries.
• Types of products that can be traded.
• Daily P&L amounts.
The market risk function within a bank, sometimes known as market risk control, falls within the mandate of the chief risk officer, who is also responsible for the credit and operational risk of the firm.
Market risk is responsible for:
• Agreeing on, with the board and heads of business, the market risk limits that the trading desk can run.
• Quantifying, monitoring, and reporting the market risk exposures of the trading desk.
• Authorize short-term limit extensions or ask for positions to be closed to bring
