Effective Product Control

CHAPTER 14Profit and Loss Reconciliations and Sign-Offs

There are two primary P&L reconciliations performed by product control. These are the comparison of the front office estimate to product control's P&L and the comparison of the P&L in the general ledger (GL) to that reported by product control. This chapter will look at both these reconciliations and will also review the front office P&L sign off, which is another important control which product control interact with.

Flash vs. Actual

One of the key controls maintained by product control is the comparison of the flash to the actual P&L produced by product control. An accurate flash is important as it shows the desk understand their book, which includes its trading activity, existing risk and the market rates used to revalue their portfolio.

When the desk persistently publish an inaccurate flash it indicates something is wrong. The issue could be due to a range of reasons such as trader laziness, a genuine misunderstanding of how their P&L is measured or system error. Given the importance of this control, any issues rendering it ineffective should be identified and remediated.

At most banks, if the product control P&L is materially different to the flash, the desk will come under a lot of pressure from their management. It is therefore important that product control informs the desk on T+0 if they intend to adjust the desk's P&L by a material amount; for example, for changes in valuation adjustments.

Apples to Apples ...