Back-to-front is the new mantra of the business. There is logic in this. Modern technology means that front-to-back portfolio management systems have become a more viable and common deployment option for the buy-side. There is definitely cost advantage in the new structures but crossing the Rubicon to a fully-integrated back-to-front platform is no simple task. The models are not all alike. State Street has its ‘One State Street’ offering to provide a fully integrated front-to-back, plug-and-play service, linking custody and fund administration with Charles River’s Investment Management System. Northern Trust launched its Integrated Trading Solutions last year, an outsourced trading service combining its equities and fixed income capabilities with middle- and back-office services. It also integrated its middle-office technology with a number of order management systems (OMS) providers, including Bloomberg, focusing on trade capture, data synchronisation and reconciliation. BNP Paribas utilises Broadridge’s Portfolio Master, which combines order management, portfolio management and risk management into a single application, giving BNP a range of new front-office capabilities alongside its custody and fund administration services. BNY Mellon has struck an alliance with BlackRock, whereby they provide mutual clients with data insights, accounting and asset servicing tools as an addition to those already available on BlackRock’s Aladdin portfolio and risk management platform.
But there are issues to overcome for all these proponents of back-to-front. I am sure a longer list could be drawn up, but I see four major challenges. The first is data integrity. The second is client mobility. The third is technical complexity. And the final one relates to client service capability.
As the front- and back-office of banks align on product and P&L, there have to be questions around maintaining the confidentiality of client data. It is obviously dangerous and illegal for client proprietary information – such as lines of stock overhanging the market, lending positions or derivative plays – to be visible to the trading arms of the banks. As the historic barriers between the securities services’ product and the front-office service providers are removed, new protocols are needed to ensure that the historic strong link between front-office and trading arms remain inviolate. We also need to make sure that the data held for clients is only accessible by the authorised people within a firm. The structures to ensure this are well known to all, especially those dealing on a multi-corporate basis across their firm’s global footprint. But it is important that the rulebook is clear and the penalties for malfeasance or mistake are explicit and draconian.
Client mobility is impacted by back-to-front solutions. The idea of having a maximum number of hooks into a client to raise the barriers for exit has existed for decades. But the operational and technological disparity between many of the back-to-front solutions, as indicated in the first paragraph of this blog, means that multiple firms in the space do not necessarily create easy solutions to any decision to change provider. This also impacts contingency arrangements and there is a risk that buyers are too tied to a single provider and lack flexibility to move assets and functions at a time of crisis, either at entity, market or global level.
As the product extends its scope and connectivity increases, the technological risks increase. Paradoxically, in some ways a single application across more functions will reduce cost but not necessarily risks. The incidence of change management increases with increased product coverage and the potential for conflict between deadlines, especially relating to infrastructure change, increases with scope. Standards are also a challenge with the prevalence of ISO/FIX standards in the front-office and ISO/SWIFT ones in the back. The quantum of data expands, as will the demand for bespoke and market standard reports and this will place different peak demands on processing capacity, some of which could clash and need careful scheduling. The contingency plans of any back-to-front provider need to be examined as a single hot standby or parallel processor may not be sufficient for a data universe covering both front and back office with their different regulatory reporting requirements and penalty regimes.
And finally, we need to revisit the client service and support model. We have the choice of multiteam specialists to serve the client or a lead relationship manager with access to specialist support. In time, and with training, more lead relationship managers will be capable of wider coverage and there will be a lesser need for the specialist support. But investment is going to be needed to train client facing staff to grow their knowledge base and be able to provide a more holistic view of the client’s product range. And, as front-office products evolve at a faster rate than new back-office solutions, leading edge clients are going to demand ever greater coverage of markets and products, from knowledgeable counterparts. And one should not forget that traditionally immediacy is on a different scale when one talks front-office versus back-office.
The new idea of back-to-front is exciting. It will also be a costly investment for those who want to get it right for it reaches into the core of the business with new technology, new operating procedures, new compliance challenges and a major need for up-skilling of staff. The value added, if the market gets the detail right, will be remarkable and will further accelerate the decline of the legacy traditionalists against the “new world” survivors. But, with fees tumbling still and the monetisation of data proving difficult to achieve at anywhere near the scale initially forecast, the question will arise around whether the new paradigm is profitable enough to merit the major investment needed. Survival, as always, at times of material change, will be challenging.