the business.
• Model validation and approval.
As with any control function, it is important that market risk remain independent of the trading desk that they are aligned to.
Market risk rely on product control for the following:
• The official daily P&L which highlights what positions are generating the desk's P&L.
• A clean MTM P&L, which will be used for VaR back testing.
• Independently verifying the end of day marks (prices, rates and volatilities) used to revalue the desk's open positions.
• Advice on the availability of market prices when new products are proposed.
Product control (including valuation control) rely on market risk for:
• Market risk exposures (used for risk based P&L estimates).
• Approving and calibrating the financial models used to generate fair values.
• Assistance in quantifying financial model reserves.
• Assistance in determining the banking book and trading book classifications.
• Insights into the financial markets, particularly when quantifying prudential valuations for regulators.
• Allocating trading positions in the fair value hierarchy and determining fair value through the independent price verification process.
Financial Reporting
Historically, the role of financial reporting (which can also be known as financial control) in banking was a little secondary in finance. Reporting was not as stimulating as the front office facing product control and was regarded as a bit of a backwater by some. The key perspective in financial reporting is that of the legal entity and the governance around it is often set in law.
The role of financial reporting is in many ways at least as important, if not more so, as product control. The role was to report to an external body the results of the legal entity under the relevant rules or requirements. This would cover:
• Management reporting to the board of a legal entity.
• Financial reporting, audited financial statements and filing as part of the Companies Act requirements under IFRS and local GAAPs.
• Regulatory reporting to the local regulatory bodies – in the UK this is to the Prudential Regulatory Authority (PRA) and the European Banking Authority (EBA).
• Statistical reporting – in the UK typically this is the Bank of England (BoE).
• Other local filings and enquiries – for example, the Financial Conduct Authority (FCA), Office for National Statistics (ONS), and so forth.
The risks associated with financial reporting are high. The board members are personally responsible for shareholder or creditor loss if they knowingly act in a fraudulent or illegal manner. Regulators can impose fines, custodial sentences, and close the business down if they are not satisfied.
In recent years the importance of this has become particularly focused as the misdemeanours of the industry and lack of vigilance by the regulators have resulted in the media and politicians baying for blood and a large number of new requirements across the regulatory bodies.
The financial reporting team review and challenge the results presented to them, the role of product control is to provide an explanation and rationalization of the business results in the legal entity and thereby allow for onward explanation to stakeholders.
Management Reporting
The management reporting team, sometimes known as performance reporting, is responsible for providing a bank's management and external stakeholders with insight into the bank's performance.
At its core, this function will:
• Work with the businesses to establish budgets for revenue and expenses.
• Monitor the relative performance of the business against these budgets and obtain commentaries (usually from product control), which explain the performance drivers, on a weekly, monthly, quarterly and annual basis.
This function is heavily reliant on product control providing transparency into the business's performance through commentaries that describe both the outright performance and relative performance to plan (budget/forecast) or prior period (quarter, half or year).
The management reporting team expects that the performance data they are consuming (P&L and balance sheet) is accurate, rendering them completely reliant on product control executing the necessary controls over the business to ensure the data they are consuming is valid.
Where this function delivers added value is by providing senior management (e.g., group CFO) with transparency into the drivers of a business's performance in a clear and succinct manner. Consequently, this team's communication skills, both written and verbal, need to be of a very high quality.
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