New on FinoLib · Volume IV: Finance Careers
New on FinoLib, my finance education website: I have published an article called Product Control, Fund Administration and Transfer Agency Roles, 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.
E.7 Product Control
The idea in plain words
Product control produces each trading desk’s official daily profit and loss, explains it move by move, and checks the prices behind it. It reports through the CFO line and never to the desk, because traders mark their own books and would otherwise be judging their own work.
Key points
■The P&L explain splits the day into delta, gamma, credit, carry and new trades; the rest is unexplained.
■Unexplained P&L above a threshold is escalated the same morning.
■Independent price verification must be done outside the dealing room, at least monthly.
A closer look
Product control owns the trading desks’ profit and loss: it produces the official daily P&L, explains every dollar of it, and checks that the prices behind it are fair. It exists because traders mark their own books and are paid on the result; an independent team in finance checks that the reported number is one the bank could realize.
A worked example
Worked Example: The Daily P&L Explain
The P&L explain (or P&L attribution) breaks the day’s official P&L into the moves that caused it, using the desk’s risk sensitivities. Whatever the sensitivities cannot account for is the unexplained P&L. An illustrative rates and credit desk has a DV01 of −$85,000 (it loses $85,000 for each basis point rates rise), gamma of $1,500 per bp², and a CS01 of $20,000 (it gains $20,000 for each basis point credit spreads tighten). Today rates rose 6 bp and spreads tightened 2 bp.
Why It Matters
A mark the desk sets and nobody independent challenges becomes reported profit, then bonus, then a loss when the position is sold. In 2013 JPMorgan paid a $200 million SEC penalty over its Chief Investment Office’s 2012 trading losses; the SEC found that the office’s valuation control group, “whose function was to detect and prevent trader mismarking,” was “woefully ineffective and insufficiently independent,” and that outside counterparties had valued certain positions about $500 million below the traders’ marks.
Getting In and Moving Up
Question Typical answer Entry titles Product Control Analyst or graduate analyst in a bank’s finance program; Valuation Control Analyst. The ladder (typical years) Analyst (0-3) → Associate (3-6) → Vice President, owning a desk’s P&L (6-10) → Director, Head of Product Control for a business line (10-15) → Global Head of Product Control (15+). Qualifications that help CPA, CA or ACCA: common. CFA: common on the valuation side. FRM: optional, useful for moves toward market risk.
Recap
Product control produces each desk’s official daily P&L, explains it move by move and checks the prices. It reports through the CFO line, never to the desk.
E.8 Fund Administration and Transfer Agency
The idea in plain words
A fund administrator keeps a fund’s books and strikes its official NAV, the price investors buy and sell at. A transfer agent, called an RTA in India, keeps the register of investors and processes every purchase, redemption and payout.
Key points
■US mutual funds use forward pricing: the NAV next computed after the order (Rule 22c-1).
■A late order at the wrong NAV takes value from existing shareholders.
■US transfer agents must turn around 90% of routine items within three business days.
A closer look
A fund administrator keeps a fund’s books for the manager: fund accounting, the official NAV, investor servicing and anti-money-laundering checks on investors. A transfer agent (in India, a registrar and transfer agent, or RTA) keeps the register of who owns the fund’s units or a company’s shares, processes every purchase and redemption, and pays distributions. The manager’s side of the NAV, the shadow NAV and its sign-off, is in C.12: The Head of Fund Accounting.
A worked example
Worked Example: A Dealing Day and a Late Order
An illustrative US mutual fund has net assets of $500,400,000 and 40,000,000 shares at today’s 4:00 p.m. NAV. NAV per share: $500,400,000 ÷ 40,000,000 = $12.51. Orders received before 4:00 p.m.: subscriptions of $2,502,000 receive $2,502,000 ÷ $12.51 = 200,000 shares; a redemption of 120,000 shares pays 120,000 × $12.51 = $1,501,200. Net cash into the fund: $2,502,000 − $1,501,200 = $1,000,800, which the TA reports to the portfolio manager and the custodian before the next morning. The late order: a $1,000,000 purchase arrives at 4:20 p.m., after good news. It must get tomorrow’s NAV, say $12.60: $1,000,000 ÷ $12.60 = 79,365.079 shares.
Recap
A fund administrator keeps a fund’s books and strikes its official NAV; a transfer agent keeps the investor register and processes every purchase, redemption and payout.
What the full article covers
In the full article I take you through these sections:
■E.7 Product Control
■E.8 Fund Administration and Transfer Agency
It includes worked examples, 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, Product Control, Fund Administration and Transfer Agency Roles, 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