Product control in the context of capital markets is one of the most important functions in any organisation that trades financial products. The timely, complete, and accurate reporting of profit and loss (P&L) is essential to the proper functioning of such a business. But that is merely the most basic task of a good product controller. That role involves much more than mere reporting. A good product controller provides serious business intelligence to both his trader and his own management. Sadly, many product control teams do not reach their true potential. In this article, I explain how and why product control teams fail based on nearly a decade of experience in the field.

What Product Controllers Do…

Defining what a product controller does is sometimes difficult. The simplest explanation might go something like this:

Just about every business involved in trading financial products will have a Finance team. This team must reconcile the numbers that the trader sees in his end-of-day P&L reports, with the numbers that are officially reported. This is simple in theory and extremely difficult in practice. Something always goes wrong in the reporting process. Some odd system glitch, some daemon of our own design, some unexpected problem, always causes some sort of deviation between what the trader expected and what actually got reported into books and records.

The job of a good Finance team is to figure out where the difference lies, and to explain it.

This function usually splits further into separate sub-functions. Financial Control handles the balance sheet aspect of the desk’s performance. That is to say, at the end of every month, FinCon figures out how much the reported value of all assets and liabilities changed.

Product Control, on the other hand, deals with the income statement. This is daily profit and loss. According to basic accounting theory, the sum of daily P&L is equal to the change in the balance sheet.

That’s the theory, anyway. The practice is very, very different. That quote from Yogi Berra explains the situation perfectly. (The man truly was a poet for our time.)

… And What They Don’t, or Shouldn’t

So if product controllers are in charge of dealing with daily P&L… what, exactly, does that mean?

It means that the PC is responsible for understanding every single moving part of his book.

As a result, a good PC can become very nearly as knowledgeable about a trading business as the trader that he works for. A really skilled and experienced PC is worth his weight in gold. He knows the ins and outs of the books. His understanding of the products is rooted in practical experience. Because he will have faced many problems and challenges, he will not be easily fazed by new ones. And he will become a true asset to his trader and his managers.

Most importantly, he is the first line of defence for a capital markets business against mischief and malarkey conducted by an unscrupulous trader. A good PC will see irregularities in his books and will know when and how to report them.

But far too many PCs never get to that level. All too often, that is because they get stymied along the way by forces that are simply not within their control.

A PC is not a whipping boy to blame for every problem that a trader experiences. He is not an IT expert – or he bloody well shouldn’t be, in a well-run organisation. He is not a pricing or risk expert – that is his trader’s job. And he is most definitely not a trader’s friend, though many PCs are, and should be, on friendly terms with their traders.

This helps explain how and why product control teams fail. Through a combination of bad systems, poor training, unreasonable demands, and misunderstood roles, too many product controllers become frustrated or never progress to the next stage of their careers.

Problems and Solutions

Here are several specific problems that cause product controllers and their teams to fail. And with them I have provided clear solutions as well, along with who should be responsible for implementing them.

1. Bad Systems

This is the single biggest reason why product control teams fail. When I started my last product control role back in 2011, the Swaps PC team routinely worked 17-hour days. Everyone in my own team left within 3 months of my joining the firm. Turnover within Rates Product Control was somewhere in the region of 50% or higher. The systems were appalling.

The Swaps team had no idea what was traded and when and how. They couldn’t capture their new business. The Exotics team needed an hour to save down market data, and another hour to price a small book of under 5,000 positions.

Both problems were solved eventually. For my books, I personally built out Excel trade bookers and pricers that eliminated at least 90% of our pricing discrepancies instantly. And I wrote a series of market data scripts that reduced the time for saving market data for two businesses from two hours to two minutes.

Thing is, though – NO ONE in Finance should have had to do ANY of this. We were forced to become systems experts because if we didn’t do the job, nobody else would. But that was entirely the wrong way to deal with the issue.

Solution: This problem can only be solved at the top. If you have crappy systems, you need to acknowledge the fact. Excel is an amazing program but if you are keeping sensitive pricing and P&L data on it, that is a recipe for disaster. Your organisation MUST have a robust, secure, end-to-end pricing and P&L system that simply gets things DONE. Build or buy one. If you can’t, you’ll bleed money forever and lose good people every year that you cannot replace.

2. “I Just Produce Numbers”

I have seen too many product controllers fail to be effective because they don’t take the time to learn how their traders think. This is such an easy mistake to fix that I’m surprised more PCs don’t do it. The responsibility for this lies squarely with PCs themselves.

When I started working in product control, I understood derivatives at a very theoretical level – and not all that well, either. Then I started closing the books and sitting beside my USD Bermudan Rates Options traders, and I began to understand how little I really knew. Simply by sitting near my traders once every couple of weeks, my knowledge skyrocketed.

If you are a product controller, you must understand your books and your products. You have a responsibility to your trader to work hand-in-glove with him to get his P&L right. You’ll be far more effective if you actually know what he’s doing.

Solution: Once the madness and mayhem of every month-end is done, book in a 30-minute chat with your trader or desk head. Ask him to discuss with you how he made money that month. Get him to tell you how he views the market. Ask him what projects he wants to do to improve his portfolio. See what you can do to help him. The moment you stop being just “the numbers guy”, and start being a partner to the business, you become very valuable to your organisation.

3. Hiring the Wrong People

Product control isn’t easy. But it’s not rocket science either. I’ve seen too many people argue that product controllers need advanced degrees in mathematics and finance to figure out P&L attribution and risk. This is false. A good product controller can understand risk as long as he has a reasonable head for numbers and a desire to learn. As for attribution – take it from someone who’s done actual presentations on SABR pricing as a practitioner, it’s NOT hard to figure out.

Solution: This mindset has to change at the unit level within Finance organisations. Stop pretending that every Finance organisation needs its own Strats team. Product Control doesn’t need people with Master’s degrees in Computational Finance, or PhDs in Applied Mathematics. Hire smart, motivated, competent people who like challenges. Screen for autodidacts who have a systematic approach to problem-solving. and – this is critical – can actually communicate. I’ve literally seen people with PhDs in Mathematics who can solve stochastic differential equations for fun, fail to host a simple meeting. That kind of situation is disastrous in a Finance organisation.

4. Refusing to Change with the Times

This problem is endemic at the firm level. In the wake of the Great Crash of 2008, the American banks by and large cut really hard and deep, and made very painful sacrifices to rebuild their systems and processes. Their European counterparts often did not. The difference showed clearly ten years later. Today Goldman Sachs and JP Morgan have a common systems architecture and backbone that lets them develop their technology quickly and effectively. JPM, in particular, invested mind-boggling sums of money in technology to standardise systems and reduce complexity. As a result, their capital markets business runs much more smoothly than at many of their rivals.

Other banks recognised the need to modernise far too late, and ended up cutting tens of thousands of jobs and exiting entire business lines completely. I know what kind of pain and shock that causes – I was one of its victims.

Solution: If you can see that you have a problem with your technology, fix it immediately. Make the hard decision to cut investment elsewhere and pour the money into standardising technologies instead. Focus on new methods of development, like the AGILE framework. Build out dedicated teams of Strats who can analyse a disastrous patchwork of creaking and bloated systems. Empower them to streamline everything down into one single pricing and P&L framework that can be replicated and scaled across multiple businesses.

Conclusion: Good Product Control is an Art

Product control teams fail because of a combination of factors. Individual controllers can fix some of these themselves by taking steps to learn as much as they can from the people that they work with.

Managers can fix other factors by hiring the right people – not necessarily the brightest, but the smartest. I have long argued that there is a huge difference between someone who is bright and someone who is smart. That difference can be best summed up as follows:

Finally, some behaviours can only be changed at the organisational level. If an organisation has lousy systems, those must be fixed as a matter of utmost urgency. And if competitors are outstripping the organisation, beating it on pricing, execution, and quality, then the organisational culture must change, and fast.

Good product control teams are essential to the smooth functioning of a capital markets business. Learn from these simple lessons, and the business will prosper. Fail to heed them, and watch as the business falls apart.