OPERATIONS STRUGGLE TO KEEP PACE WITH FRONT OFFICE WHILE STP CAN RELIEVE MARGIN PRESSURE

“European trends towards cross-border trading, cross-asset class trading, cross-margining, cross-collateralisation, cross-funds transfer and cross-channel trading…coupled with a tsunami of regulation…means that firms are having to focus on what I call ‘complexity management,” said Tony Kirby, Co-Chair, MiFID Joint Working Group.

Mind the Gap
Marianne Brown, President & CEO, Omgeo, concurred with this view, citing the challenge that faces the operation functions of financial institutions in keeping pace with the front office. Marianne said, “Whilst products are becoming more homogenous in the front office they are still siloed when it comes to trade processing. This creates the issue of ‘Mind the Gap’ and is particularly true where structured products are concerned.”

Operational Latency
The corollary of this increasingly complex trading environment is a new phenomenon which Tony Freeman, Executive Director, Industry Relations and Market Growth, Omgeo termed as “operational latency”. This occurs when investors express an interest in dealing in new or complex products without having the ability to process them.

Brian Mitchell, Head of Dealing & Portfolio Control, Baring Asset Management, commenting on this said, “Clients cannot safely trade in instruments that they cannot process efficiently, internally. The key here is to ensure that the amount of time between respective operational, trading and investor business team’s reviews and sign-off is kept as short as possible. It is the complex derivative and OTC products that are the main issue.”

Profitability
Moreover, during the discussion, it was agreed that despite this increasing pressure on operations to keep up with the front office, financial institutions are looking increasingly to the back and middle office to contribute to the overall profitability of a firm.

Brian Mitchell said that where regulatory disclosure trends along with the evolution of DMA and algorithmic trading had squeezed historic commissions, the one or two basis points that operational efficiency can deliver could make a real difference. He added, “The cost of serving clients has really changed: while there are higher volumes, bundled commissions and revenues have declined.

Operational inefficiency can cost 1-2 basis points, which may be insignificant for some transactions but when margins are extremely tight for all, that’s where efficiency can make a difference to overall net underlying client returns.”

Backing up this assertion, Marianne Brown made the point that in today’s environment the focus of the industry is “profitability rather than revenue”.

Changing profile of operational professional
According to Simon Haggerty, Executive Director, Global Operations, UBS, “The three key trends in this space; automation, offshoring and ultimately outsourcing, has led to an evolution in the types of professionals working in the back and middle offices at the ‘centre’ of financial organisations.

He added that these trends, “...mean that we no longer have large processing teams in the centre, and the make up of the staff that remain has changed. Such staff tend now to be much more focused on client service, risk management or process excellence.”

Retention of staff in the back office has also become an issue as operations professionals are being attracted to work in the middle and front office, as well as at hedge funds. Tony Kirby said, “One of the key challenges is how to retrain and retain staff within the back office on both the buy-side and sell-side. It is hard attract and keep the right staff to keep up with the pace of innovation, regulation and efficiency gains.”