The Debate: the role of middle-office operations
17 April 2015 London
Image: Shutterstock
Photo, from left to right: Andrew Butler of BNP Paribas Securities Services, Keith Hale of Multifonds, Guillaume Boland of SWIFT, Laura Craft of Traiana.
SWIFT, Multifonds, Traiana and BNP Paribas give their take on the increasing importance of the middle-office operations role, whether this is a positive step, and how quickly the industry can adapt.
It has been suggested that there will be a rise in the importance of the middle-office operations role in the next five to 10 years. Do you see this as a positive step and how quickly can the industry adapt?
Guillaume Boland, Senior marketing manager, SWIFT: It’s clear to see why there is an increased focus on the middle office; it is driven mainly by global regulations that are pushing financial institutions to focus on risks, compliance and operational efficiency. The difficulty for global institutions is in tracking all these various regulations in every jurisdiction and applying them with consistency.
For smaller firms with smaller teams, this can become complex and very labour intensive. Wherever possible, manual processes need to be automated. In this environment, the middle office functions need to be listened to more closely by both front and back office. The efficiencies that they drive are now mission critical and are tracked closely by management. In the next five years, this focus does not seem likely to diminish.
At SWIFT, we are always seeking to drive efficiency through industry standards and by promoting straight-through processing and automation of financial communications. We have also launched tools to support the middle office, such as bilateral and triparty collateral management solutions, the SWIFTRef reference data utility and our recent launch of a suite of financial crime compliance solutions, including Sanctions Screening and the KYC Registry.
There is certainly talk about a rise in importance of the middle office, however ,this implies that there will be drastic changes in this space; and it’s important to remember that these changes will need to combine cost reduction, innovation and operational efficiency to deliver on expectations.
Laura Craft, Director, equities and fixed income strategy, Traiana: Financial institutions today face significant challenges, as regulators seek to reduce widespread exposure to risk, and instill greater transparency and accountability. Against this background, the middle office is becoming more and more important.
Many institutions are operating with large, complex, unwieldy legacy systems, many of which have not changed significantly in the last 20 to 30 years, and were never designed to withstand today’s trading volumes and challenges. Similarly, there is a desire to avoid complicated and potentially risky self-build models, and instead adopt market-wide solutions that will result in standardised processes.
Only a flexible and adaptable middle office can ensure that firms are prepared for change. At Traiana we work closely with the middle offices to educate and provide services that assist in improving client servicing, straight-through processing (STP) efficiency and overall streamlining of operations to reduce risk. As clients constantly review broker performance via scorecards, it is more frequently the bank’s post-trade ability that is under scrutiny rather than front office execution. Timeliness of confirmations, handling of exceptions, matching trade details are all expected on trade date regardless of the sophistication of the end client.
Those institutions that fail to invest in technology to consistently provide excellent client service across the multiple trade confirmation platforms and protocols will undoubtedly fall behind their peer group. Increasingly, the middle office functions are forming a greater importance in the sell-side sector and many banks are beginning to make the necessary investment and retire legacy platforms that are often no longer fit for purpose.
Andrew Butler, UK head of product for asset and fund services, BNP Paribas Securities Services: Middle-office operations are too easily overlooked when addressing the way investment firms handle regulatory change and the drive towards greater transparency in our industry.
The role of middle office operations teams will definitely continue to grow in importance in coming years, giving institutional investors and providers exciting opportunities to work together and create a healthier, more robust investment environment.
Transparency is a key part of this evolution, with investors and regulators alike asking for clear visibility on vast amounts of data, covering complex investment strategies, across multiple asset classes, locations and so on. Accordingly, oversight of operations managed by third party providers becomes a critical element, made clear by the UK Financial Conduct Authority’s ‘Dear CEO’ letter on the topic.
These challenges put tremendous strain on fund managers, diverting them from their core competencies. However, with the correct middle-office set up and the right provider, firms can manage their data in remarkable new ways and not only achieve transparency and oversight to monitor their activity, but go further and enhance their decision-making.
I think this is a very positive step for the industry. It shows a pro-active, strong response to challenging regulatory and market conditions. It also brings service providers, like ourselves, closer than ever to our clients, building strong relationships that add real value for investors.
Keith Hale, Executive vice president, client and business development, Multifonds: The middle office is set to play an important role as the need for transparency and access to data increases, but unfortunately without an accompanying rise in budget. The consumers, the asset managers, want the extra information, but they’re not prepared to pay more for it. They increasingly need their middle office to deliver a consolidated holistic view of their investment book of records (IBOR), on demand, across asset classes and across jurisdictions, but without incurring additional operational costs.
For many, the assembly and delivery of this holistic data relies on a complex infrastructure of databases, warehouses and portals, connected to the clients’ front office, pricing, custody and accounting systems, and bound together by layers of integration and reporting technology. Therefore, building a timely and transparent view of an investment portfolio, and its operational status, is a complex and expensive task. This is a real hindrance in building the business case for improved middle-office operations.
One proven industry approach for overcoming this situation is to combine the investment view of cash flow, positions and profit and loss—the IBOR with the back-office accounting, ABOR view (accounting book of records) with full end-of-day NAV and general ledger, on a single common platform.
This approach with a common platform removes a great deal of the data and operational duplication and processing to deliver greater scale and efficiencies without significantly increasing operational costs. It enables asset managers and sophisticated administrators to access a consistent IBOR on demand via either portal or direct access, without the complex layers of technology.
SWIFT, Multifonds, Traiana and BNP Paribas give their take on the increasing importance of the middle-office operations role, whether this is a positive step, and how quickly the industry can adapt.
It has been suggested that there will be a rise in the importance of the middle-office operations role in the next five to 10 years. Do you see this as a positive step and how quickly can the industry adapt?
Guillaume Boland, Senior marketing manager, SWIFT: It’s clear to see why there is an increased focus on the middle office; it is driven mainly by global regulations that are pushing financial institutions to focus on risks, compliance and operational efficiency. The difficulty for global institutions is in tracking all these various regulations in every jurisdiction and applying them with consistency.
For smaller firms with smaller teams, this can become complex and very labour intensive. Wherever possible, manual processes need to be automated. In this environment, the middle office functions need to be listened to more closely by both front and back office. The efficiencies that they drive are now mission critical and are tracked closely by management. In the next five years, this focus does not seem likely to diminish.
At SWIFT, we are always seeking to drive efficiency through industry standards and by promoting straight-through processing and automation of financial communications. We have also launched tools to support the middle office, such as bilateral and triparty collateral management solutions, the SWIFTRef reference data utility and our recent launch of a suite of financial crime compliance solutions, including Sanctions Screening and the KYC Registry.
There is certainly talk about a rise in importance of the middle office, however ,this implies that there will be drastic changes in this space; and it’s important to remember that these changes will need to combine cost reduction, innovation and operational efficiency to deliver on expectations.
Laura Craft, Director, equities and fixed income strategy, Traiana: Financial institutions today face significant challenges, as regulators seek to reduce widespread exposure to risk, and instill greater transparency and accountability. Against this background, the middle office is becoming more and more important.
Many institutions are operating with large, complex, unwieldy legacy systems, many of which have not changed significantly in the last 20 to 30 years, and were never designed to withstand today’s trading volumes and challenges. Similarly, there is a desire to avoid complicated and potentially risky self-build models, and instead adopt market-wide solutions that will result in standardised processes.
Only a flexible and adaptable middle office can ensure that firms are prepared for change. At Traiana we work closely with the middle offices to educate and provide services that assist in improving client servicing, straight-through processing (STP) efficiency and overall streamlining of operations to reduce risk. As clients constantly review broker performance via scorecards, it is more frequently the bank’s post-trade ability that is under scrutiny rather than front office execution. Timeliness of confirmations, handling of exceptions, matching trade details are all expected on trade date regardless of the sophistication of the end client.
Those institutions that fail to invest in technology to consistently provide excellent client service across the multiple trade confirmation platforms and protocols will undoubtedly fall behind their peer group. Increasingly, the middle office functions are forming a greater importance in the sell-side sector and many banks are beginning to make the necessary investment and retire legacy platforms that are often no longer fit for purpose.
Andrew Butler, UK head of product for asset and fund services, BNP Paribas Securities Services: Middle-office operations are too easily overlooked when addressing the way investment firms handle regulatory change and the drive towards greater transparency in our industry.
The role of middle office operations teams will definitely continue to grow in importance in coming years, giving institutional investors and providers exciting opportunities to work together and create a healthier, more robust investment environment.
Transparency is a key part of this evolution, with investors and regulators alike asking for clear visibility on vast amounts of data, covering complex investment strategies, across multiple asset classes, locations and so on. Accordingly, oversight of operations managed by third party providers becomes a critical element, made clear by the UK Financial Conduct Authority’s ‘Dear CEO’ letter on the topic.
These challenges put tremendous strain on fund managers, diverting them from their core competencies. However, with the correct middle-office set up and the right provider, firms can manage their data in remarkable new ways and not only achieve transparency and oversight to monitor their activity, but go further and enhance their decision-making.
I think this is a very positive step for the industry. It shows a pro-active, strong response to challenging regulatory and market conditions. It also brings service providers, like ourselves, closer than ever to our clients, building strong relationships that add real value for investors.
Keith Hale, Executive vice president, client and business development, Multifonds: The middle office is set to play an important role as the need for transparency and access to data increases, but unfortunately without an accompanying rise in budget. The consumers, the asset managers, want the extra information, but they’re not prepared to pay more for it. They increasingly need their middle office to deliver a consolidated holistic view of their investment book of records (IBOR), on demand, across asset classes and across jurisdictions, but without incurring additional operational costs.
For many, the assembly and delivery of this holistic data relies on a complex infrastructure of databases, warehouses and portals, connected to the clients’ front office, pricing, custody and accounting systems, and bound together by layers of integration and reporting technology. Therefore, building a timely and transparent view of an investment portfolio, and its operational status, is a complex and expensive task. This is a real hindrance in building the business case for improved middle-office operations.
One proven industry approach for overcoming this situation is to combine the investment view of cash flow, positions and profit and loss—the IBOR with the back-office accounting, ABOR view (accounting book of records) with full end-of-day NAV and general ledger, on a single common platform.
This approach with a common platform removes a great deal of the data and operational duplication and processing to deliver greater scale and efficiencies without significantly increasing operational costs. It enables asset managers and sophisticated administrators to access a consistent IBOR on demand via either portal or direct access, without the complex layers of technology.
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