Middle and Back Office Trade Processing and Operations
Frequently Asked Questions
- What does Middle and Back Office services mean?
- What are the factors driving the demand for outsourcing Middle and Back Office operations?
- Has there been significant shift in the expectations for outsourcing Middle and Back Office services over the last one year? If yes, then how, and do you expect it to change in the future?
- What is the key to quality Middle and Back Office operations? How do the various service providers in this field, and in particular Point Nine, differentiate themselves?
1. What does Middle and Back Office services mean?
Middle and Back Office services include all the operational requirements of a financial institution following the execution of a trade. The Middle and Back Office takes over the minute a trader has executed a trade, and manages it's whole life cycle.
Operations carried out by the Middle and Back Office include:
- Ensuring that the transaction is correctly captured and stored in all appropriate systems and can be monitored and managed throughout its life cycle.
- Confirming and reconciling all transaction details with the counterparty to the trade.
- Disseminating and daily reconciling all transaction details with any third party service providers.
- Settling all cashflows and asset deliveries related to a transaction.
- Processing and recording all transaction life cycle events and reporting all such events and each transaction's status.
- Setting up into all appropriate systems all market data that are required for operations, processing, reporting, valuing and risk measuring of transactions.
- Setting up into all appropriate systems all static data that are required for operations, processing and reporting of transactions.
- Managing all collateral moves with the counterparty to the trade in Over-The-Counter (OTC) transactions.
- Handling and recording all communication and queries arising from any third party.
- Creating all type of reports, for example:
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- Position reports
- Profit and Loss reports
- Profit and Loss (P&L) attribution reports
- Risk reports (market and specific risk)
- Counterparty reports (credit risk)
- Cashflow and liquidity reports
- Option exercise schedules
- Other reports necessary to successfully communicate all operations mentioned above, for example: reconciliation report with the counterparty to the trade, expected cashflow and asset delivery report, actual settlement report, life cycle event and transaction status report, collateral management report, etc.
- Maintaining a robust and secure Disaster Recovery process to ensure continuity of operations.
2. What are the factors driving the demand for outsourcing Middle and Back Office operations?
To keep up in this increasingly competitive market, fund managers constantly expand the volume of trading and the range and complexity of products that they trade in. In most cases this requires an enhancement of the existing Middle and Back Office operations and associated infrastructure. This means investment in both time and money; experienced Middle and Back Office professionals need to be hired, office space may need to be expanded, and an upgrade, or a even a complete overhaul of the fund's systems and IT infrastructure may be required.
The operational requirement of a traded product is exactly the same irrespective of the fund manager that is trading it. This repetitive nature of operations makes it an ideal outsourcing candidate. Operations can be centralised around skilled experienced professionals and specialised systems built by experts specifically for Middle and Back Office operations. This can result in a better service that can be provided by an internal team and therefore in lower operational risk.
Outsourcing of the Middle and Back Office operations to support higher trading volumes or entirely new products helps fund managers reduce their time-to-trade while simultaneously increasing their operating efficiencies and cost savings.
In cases where new funds are being set up, fund managers completely avoid the time and money investment required to set up an internal Middle and Back Office and instead choose to fully outsource all their operational requirements.
3. Has there been significant shift in the expectations for outsourcing Middle and Back Office services over the last one year? If yes, then how, and do you expect it to change in the future?
Over the last year there has certainly been an increase in demand for outsourcing of Middle and Back Office operations. Increased marketing and awareness among fund managers of the outsourcing industry's service offering has helped, but the most important reasons that contributed to this shift are the increasing competition among fund managers and the recent global financial crisis.
In a drive to maximise investor return, fund managers are trying to increase revenues by expanding the volumes of trading and the range and complexity of products that they trade in while requiring an almost non-existent time-to-trade in order to capitalise when investment opportunities present themselves. At the same time they are looking to reduce costs.
This is driving fund managers to consider outsourcing part or all of their Middle and Back Office operations to service providers that can support a wide range of trading product. This outsourcing service should be of outstanding standard, should meet the fund manager's high expectations and should be at least equivalent with the operation that the fund manager would have built internally had investment in time and money not been a consideration.
As a result, Point Nine has seen a significant increase of interest in this field. This year we had a faster client uptake and more inquiries into our service proposition by prospective clients than ever before. We have also seen more interest by private equity and venture capital firms looking to invest in this field. We expect that outsourcing of Middle and Back Office services will continue growing exponentially over the next few years.
4. What is the key to quality Middle and Back Office operations? How do the various service providers in this field, and in particular Point Nine, differentiate themselves?
There is no doubt in our minds that the key to a fast, reliable and professional service is automation.
It is up to each Middle and Back Office service provider to choose the automated information technology solution that is appropriate to its specific service.
We believe that it is important to be in complete control of any technological solution. Relying on third-party vendors for upgrades and support may become a bottleneck that negatively impacts the speed and quality of service that we give to our own clients. We have therefore spent a significant amount of time and investment to build our proprietary state-of-the-art, flexible and expandable web-based operations platform which is now fully operational.
Our operations platform is user friendly, accurate, secure, able to capture and store all economic and legal details of transactions and already interfaces with a number of well known prime brokers and fund administrators.
We rely on our technology and on our experienced, professional, energetic and personable staff to provide a unique service to our clients that we can be proud of.