New on FinoLib · Volume IV: Finance Careers
New on FinoLib, my finance education website: I have published an article called Finance Careers: The Six Worlds of Finance and Where Roles Sit, from Volume IV: Finance Careers. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
0.1 The Six Worlds of Finance
The idea in plain words
Finance is not one job but six different worlds. Corporate finance runs the money inside ordinary companies. Sell-side and banking sell services and advice. The buy-side invests money. Market infrastructure and operations keep trades moving. Advisory gives expert advice. Fintech builds new financial technology.
Key points
■Corporate finance is a cost center; the other worlds sell financial services.
■Principal and spread businesses carry balance-sheet risk and build the heaviest control functions.
A closer look
“Working in finance” covers six different businesses that happen to share a vocabulary. They differ in who the client is, whose money is at risk and, above all, how the firm earns its revenue. The revenue model shapes the career: pay, cyclicality and which mistakes end careers. Parts A-D of this volume map the finance function under a CFO, mostly in the first world but also at banks, insurers and fund managers. Part E maps operations and control roles elsewhere.
0.2 Front, Middle and Back Office: The Grid
The idea in plain words
Think of a restaurant. The front office is the dining room and kitchen, which earn the money and take the risks. The middle office is the manager who checks and values everything independently. The back office is the accounts team that settles the bills and keeps the records.
Key points
■The person who earns a profit must not record, value or settle it.
■Barings collapsed in 1995 after a trader also ran his own back office.
A closer look
Inside any firm that trades, lends or holds assets for others, work is split by what it does to a transaction. The front office wins the business and takes the risk: it faces clients, prices deals and earns the revenue. The middle office measures and checks that risk independently of the people paid on it: it captures trades correctly, values positions, calculates profit and loss, and monitors limits and margin. The back office makes the transaction real and records it: confirmation, settlement, reconciliation, corporate actions, client-asset records and the accounting entries. Two further rows sit across all three. Control functions (risk, compliance, internal audit) set and test the rules; in the three lines model, the business is the first line, risk and compliance the second, and internal audit the third (C.5: The Head of Internal Audit).
The rule behind the separation: the person who earns a profit must not record, value or settle it. A trader who can also book, confirm and reconcile their own trades can hide a loss until it is too large to survive.
The costliest mistake
Nick Leeson traded futures for Barings in Singapore and also ran the back office that processed his trades, hiding losses in a concealed account numbered 88888. When Barings collapsed on February 26, 1995, the cumulative loss was £827 million, more than the bank could absorb; ING took the group over. The UK Chancellor’s statement on the Board of Banking Supervision report records that Barings’ internal auditors had recommended in 1994 that Leeson, as a trader, should not run the back office, and that the recommendation was not implemented.
0.3 Where Every Role in This Volume Sits
The idea in plain words
Every role in this volume has a home world and a place on the grid, from the CFO, who sits in corporate support, to settlements, which sits in the back office. The same job title can mean quite different work in different worlds. So before you read about a role, find out which world it lives in.
Key points
■Part C roles sit mostly in corporate support and control functions.
■Part E roles are the middle and back office of banks, funds and infrastructure.
A closer look
Each role in this volume has a home world and a row of the grid; the same role changes shape when it moves between worlds. The first world named is the most common home.
A practical test for any job description: ask whose money (the company’s, clients’ or the firm’s own), what revenue model, and which row. The answers predict hours, pay and exits better than the title. Part H maps the common moves between worlds.
India Lens: The Same Map, Indian Institutions
The Securities and Exchange Board of India (SEBI), a statutory body under the SEBI Act, 1992, regulates the sell-side, the buy-side (mutual funds, portfolio managers, AIFs) and market infrastructure. The Reserve Bank of India (RBI) regulates banks under the Banking Regulation Act, 1949 and payment systems under the Payment and Settlement Systems Act, 2007. IRDAI regulates insurers.
What the full article covers
In the full article I take you through these sections:
■0.1 The Six Worlds of Finance
■0.2 Front, Middle and Back Office: The Grid
■0.3 Where Every Role in This Volume Sits
It includes the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume IV: Finance Careers
Read the full article on FinoLib
The complete article, Finance Careers: The Six Worlds of Finance and Where Roles Sit, with every worked example, diagram, quiz and source, is free to read in Volume IV, Finance Careers on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance