Back Office Structure and functions April 2006. 2 Table of Contents Back office structure and...

Back OfficeStructure and functions

April 2006

2

Table of Contents

Back office structure and functions (Benoit Schaus)

Sourcing (André Vandencamp)

Outsourcing (François Dorland)

3

Table of Contents

Back office structure and functions Overview of a financial institution landscape

Why a back office ?

A central department

Some back office issues to conclude

4

Illustration : Purchase / Sale of securityA complex operations series

Middle OfficeMiddle OfficeExternalExternal

Bankers & Clients

instructions

Front OfficeFront Office

Check completeness of instruction

(cash availability) in the banking

system

Instruction Electronic

Input instruction in the banking

system

Transmit instructions

Checks client details: cash availability,

signatures in the banking

system

TreasuryTreasury

Validate the orders in the

banking system

Back OfficeBack Office

Print the ticket from the banking system

Generate the counterparty ‘s

deal in the banking system

File the instruction

Book the deal with the

counterparty

Bloomberg

Input deal’s details in the

banking system

Complete the ticket and transmit it

Check client and bank deals in the banking system

with ticket

Execute the deals in the

banking system

Generate, validate and

send the swift messages

File the ticket with swift

messages and broker

confirmation

Overview

5

Illustration: a standard IT Architecture for a private bank in LuxembourgA complex technical environment

Bloomberg

CCLux

Client information

Instruction Electronic

S Report

Commercial action

Credit proposal

Know Your Customer

Banking System

MM rates &

security

prices

FX rates

& security

prices

Reporting interne

Bankers Alert

DB_STAGING

OLYFPRO

Fu

nd

Ord

er

Ma

na

ge

me

nt

(FO

M)

Sw

ift

All

ian

ce

Re

co

nC

lea

rstr

ea

m

(Cre

ate

&

Co

nn

ect

)

Semi- automatic

AutomaticIn-house application

phase 2

In-h

ouse

app

licat

ion

pha

se 1

Ext

ern

al a

pp

lica

tio

n

shared with Bankers

Oth

er

Overview

6

How is a trade processed in an institution ? (1/2)

Customer contacts

investment advisor

Inv.AdvisorEnters

instruction and sends to HQ

DealerBulks and

checks price quotes

DealerStrikes a deal and enters on

ticket

Middle officeEnters the

ticket + checks compliance

1 2 3

6

4 5

Overview

Front OfficeFront Office

Middle OfficeMiddle Office

7

How a trade is processed in an institution (2/2)

Settlements Pre-settlement

matching

Cash managementChecks USD

balances

ForexExchanges currencies

ClearerSecurities deliverd

ReconciliationReconcile

cash, securities

InvestigationsInvestigate if

problems occur

AccountingBook in

customer’s account

ReportingInform the customer

7 8 9 10

14 13 12 11

Overview



8

Table of Contents


Why a back office ?



9

Why a Back Office ?A simplified model

Front officeFront office Middle officeMiddle office Back officeBack office

Why a back office ?

10

Front Office: the place where the deals are done


•Trade execution•Heavy IT investments•Bloomberg, Reuters, …

Why a back office ?

11

Middle office: the go-between among FO & BO


•Compliance check•Flash P/L for Front Office•Management of complex deals•(Entering tickets)•FO Technical support (curves, rates)

Why a back office ?

12

Back Office: the final stage


• Matching• Settlements • Reconciliations• Reporting

Why a back office ?

13

Table of Contents


Why a back office ?



14

Back OfficeA central support Department in a financial institution

Payments

Treasury Trade

Securities

Back officeBack office


Settlements

Reconciliations

Investigations

Cash management

Foreign exchange

Customer reporting Static Data

Corporate actions

15

List of back office functions

Settlements

Reconciliations

Investigations

Cash management

Foreign exchange

Customer reporting

Static Data

Payments

Corporate actions



16

Settlements department

Assure that all trades that were executed in the front office are settled on time

Pre-settlement matching

Ensure correct settlement on settlement date

Usually organised by country e.g. international settlement and domestic settlement

Failed settlements can cost the institution a lot of money

Settlements



17

Cash management department

Check all the balances at correspondent banks

Ensure that money is available to finance trading and payments activity

Invest available funds overnight to ensure best return

Cash Management



18

Foreign exchange department

Ensure correct settlement of the foreign exchange transactions

Handle the administrative part of the foreign exchange deal (e.g. sending SWIFT MT 300 confirmations)

Foreign Exchange



19

Payments department

Ensure payments are made

Send payments instructions over SWIFT or other means of communication

Follow up on the payment instruction

Payments can also originate from securities or foreign exchange deals

Payments



20

Reconciliation department

Reconcile positions for cash and securities

Reconcile movements for cash and securities where needed

More and more automated

Reconciliation


Reconciliation systems can automate up to about 95 % of reconciliation items


21

Customer reporting department

Important aspect of customer service because of its visibility to the customer

Once settlement and reconciliation is done

Well automated nowadays

Push and pull distribution methodology

Customer reporting



22

Investigations department

More complex area in the back office

No real automation opportunities

Close management monitoring required

Investigations


Institutions have been seen to have Millions of USD outstanding in

investigations for years


23

Static data department

Data scrubbing

and checking

Internal feedse.g.

customer information

External feedse.g.

Bloomberg, Reuters

Back office processingSecurities dataCustomer dataCorporate actions information


24

Corporate actions department

Mandatory corporate actions Voluntary corporate actions

Bank

Issuing company

Investor

Bank

Issuing company

Investor

Communication for information Communication triggers decision

ok ?


25

Some other department

Pre-trade compliance

Post-trade compliance

Compliance


Efficiency department Business requirements

Project implementation

Efficiency enhancements

Investment funds NAV department

…

…


26

Table of Contents


Why a back office ?



27

Some back office issues to conclude…

STP, still the buzzword in back office processing?

T+3,T+2,T+1,T+0 What is the discussion all about?

How can a failed trade cost money to the institution?

28

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