Effective Product Control

CHAPTER 7Internal Control

Internal control is the final technical skill that we will explore in Part II of the book. In this chapter, we review how the market defines internal control and what influences the type of internal control framework a bank establishes. We finish the chapter with a glance at a typical set of front to back controls for a trading desk.

A good product controller will understand the internal controls which they are responsible for, whilst exceptional product controllers will understand the entire internal control framework for a trading desk.

What is Internal Control?

Each bank will maintain vast quantities of internal controls which are governed by an internal control framework. The framework provides a structure for identifying, maintaining and monitoring this often complex web of internal controls. An effective framework is necessary as ineffective frameworks provide limited defences against risks and can result in severe consequences for the bank, investors, creditors and the general public.

We have witnessed breakdowns in internal control through events like the global financial crisis (GFC), where banks gambled beyond their means and underestimated the negative fallout from those bets. There has also been a breakdown in controls over the submissions of quotes for the fixing of LIBOR and FX rates, where traders and brokers got greedy and manipulated the fixings in their favour. We have also witnessed a breakdown in internal control through rogue ...