Derivative is a financial security whose price is dependent upon or derived from one or more underlying assets. The legendry investor Warren Buffett once described derivatives as “financial weapons of mass destruction.” Derivatives like MBS and CDOs played the pivotal role in causing the 2007 global recession. Today the best of MBA graduates want to land up with a derivative trader’s job, which typically pays from a 100,000 USD to 150,000 USD for fresh graduates. We recommend you to watch the 2011 movie “Margin Call”, loosely based on the 2008 Lehman Brother Bankruptcy, to get a feel of how a derivative-trading department works. However, derivative job landscape in India is slightly different.
Work Profile Classification in Derivatives
Broadly the work profile in derivatives can be classified into Front office work, Middle office work, and Back office work.
Front office jobs include that of a trader, sales person, structuring, legal attorney and quantitative analyst. For trading and sales most of the investment banks hire the top MBA graduates from the top B-Schools globally; these jobs are typically located in the banks’ global finance centers like London, New York, Tokyo, Hong Kong etc. However, there are a few trading jobs available in India also. Firms like Futures First, NCDEX hire graduates who have the capability to become successful traders. Work load wise it is a high-stress job and firms expect trader’s to consistently make money. Those who do not perform are also fired on a short notice.
For quants and structuring jobs typically a math degree with Masters or Phd is mandatory. For candidates with required academic background there a few job opportunities in India. These jobs typically involve financial modeling and programming for trading strategies, valuation of derivatives etc.
Middle Office jobs include support functions to front office activities, risk management and financial control. There are many middle office job opportunities available in India in Bank captives and Finance KPOs. The key job profiles are as follows
1. Exotic Trade Review
This job profile involves reviewing the trade booked by traders in the banks’ risk management systems. The main function of this job is to understand the booking of an OTC derivative and match it with the actual terms and conditions of the trade. If there are any mismatched between the booking and the term and conditions it needs to be escalated to the trader or booking team. These errors significantly increases the banks risk, because once trade is booked in banks risk management system based on the booking trader hedges the position to mitigate the risk. If the actual booking is wrong then the hedging also goes wrong. On similar lines if trade terms are wrongly drafted it creates a legal risk for bank at the time of settlement when the trade matures.
2. P&L Control
The value of derivative contracts keep changing on a day-to-day basis. Primary responsibility of this function is to monitor the changes in derivative instrument and provide explanation for any large changes in the MTM value of derivative instruments. The purpose of this function is to monitor effect of changes in market parameters on derivative instruments.
3. Price Testing
Price-testing involves the independent check of the prices at which a portfolio of derivative transactions is priced at a particular point of time. This is done by comparing the prices at which the portfolio has been closed against the independently-sourced market data, from sources such as Bloomberg, Reuters, or market consensus forums such as TOTEM. Post this comparison if the portfolio is overly aggressive or conservative in how it has been marked, trader’s P&L is adjusted.
4. Trade Booking Support
This involves helping trader in booking the trades in the bank’s risk management systems. It also provides support for any change in the booking as result of change of contract terms or market events.
Most of the global banks have opened their captives in India which offer most of the middle office jobs. Middle office jobs are also offered by KPOs like Irevna, Amba Research, Copal Partners. Pay scale is in KPO is slightly lower than that in the captives but work quality is same. Average pay scale is around 6-9 lacs p.a. for fresh graduates. These firms typically hire MBA graduates from tier 1 or tier 2 schools like IIM Kozhikode, SP Jain, IMT Gaziabad, SP Jain etc, CAs, and engineering graduates from IITs, BITs, DCE and top NITs. Thought graduates from engineering background are expected to have completed some certification like CFA, FRM before applying for these jobs.
Back Office Jobs involves data-checking once the trades are done and transacting the required transfers, which involves cash settlement with counter parties when a contract expires or when a contract is signed with counterparty. Many banks have outsourced their back office operations. It is, however, a critical part of any bank. Generally graduates from tier 2 or tier 3 MBA schools are able to get jobs in back office derivative functions.
Regulatory reporting is also an important back office functions which requires good understanding of financial market regulations and derivative accounting and reporting standards.
Technology and Back office
An important part of back office job functions is technology support.
Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. For finance graduates who have the understanding of domain and technology role of a business analyst is highly lucrative. There are many technology firms operating in finance domain which hire graduate from top B-schools in India for the roles of business analysts. Most of the business analyst roles in technology have ample on-site opportunities and pay scale is above average.
A Few Tips
Which type of job any graduate is able to land up with is entirely dependent upon the academic background and aptitude of the aspirant. However it is important to do some basic research before making a career decision in derivatives. Front office jobs are high-stress, high pay and scarce. Middle office jobs are available in India and one can grow well by continually working on his/her skills and hard work. Back office jobs also provide decent growth opportunities. In fact roles like business analyst in financial technology firms are considered to be very good. We also recommend graduates to do relevant certifications and nurture a habit of learning new things about the derivative domain on a daily basis. This not only improves the knowledge and skill of individuals but also helps them grow faster in the organizations they work for.
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