Taking back control of the middle- and back-office

A major shift in technology strategies is seeing banks increasingly take back control of their middle- and back-office operations with the cloud making this much easier, writes Torstone Technology COO Mack Gill, who highlights how the trend is driven by greater automation, the need for multi-asset capabilities and greater flexibility to a rapidly changing market.

The view that middle-and back-office processes are purely a cost centre is changing. In recent years, banks have sought leaner structures – stripping costs and headcount – resulting in the widespread outsourcing of the management of these functions. These decisions are now being questioned by sell-side firms as banks and broker-dealers look for ways to improve performance in an increasingly competitive market, as their buy-side clients are setting ever-tighter KPI’s on the post-trade process. 

Where historically, outsourcing the management of middle- and back-office functions was a question of prioritising stability over innovation, today modern, componentised, cloud-based technology is allowing sell-side firms to achieve both operational flexibility and a manageable cost base without any reduction in stability.

Improving performance is a key consideration in the sell-side’s move to bring the management of middle-office functions back in-house – something hard to achieve through outsourced providers. Changing client demand is another factor catalysing the move from generic outsourced solutions, with three key trends driving the shift:

  1. Greater levels of front office automation have necessitated faster reporting and more real-time data flows both internally and externally. Clients need this information to be easily digestible, with standard formatting and straightforward performance analysis across asset classes. Not all asset classes are the same in their levels of automation and data accessibility, which makes the ability to provide these services harder for some than for others.
  2. Asset class differences have highlighted the need for multi-asset support for clients’ trading and investment operations, which dealers must be able to deliver with a rationalised cost base. The traditional model of building a trading desk for a specific asset class, supported by individual back-office processes and systems, is no longer viable given the falling margins on trading activity, and reduced support for non-agency trading.
  3. The need for greater flexibility and responsiveness to client demands and market changes. Regulators across Europe, Asia and the US markets continue to hone different models for delivering best execution, new settlement rules and collateral requirements to support derivatives trading. Consequently inventory, asset allocation and the use of repo/sec lending has been changing for the sell-side on an ongoing basis for the best part of a decade, more so for every additional jurisdiction in which they operate.

For sell-side decision makers, as every change to a regulation potentially has a knock-on effect on systems, these processes need to be mapped in order to run calculations, providing internal analytics, risk and reporting checks. This is made more difficult if an outsourcer is overseeing a portfolio of legacy technologies or managing a set of clients on a set of platforms, as changes require duplication across systems or even duplicate systems being created in order to provide the specific risk and reporting requirements for each client. The lack of flexibility is also an issue. When banks need to change their back or middle-office systems they need to join a queue before their issue is addressed by the outsourcer. 

The return in-house

Another challenge banks are facing is the huge cost of rewiring legacy platforms and the risks in overstretching their capabilities, particularly when firms expand into new geographies or asset classes. With operational costs under pressure, being able to support a client in lockstep is key. It is hard to justify the lack of a clear cost base or clarity around back and middle-office operations in the current environment, given the low cost and effectiveness of newer service models.

These problems are being solved by using platforms which have component-based modules which mean that a bank can own the exact tools it needs in order to run and grow its business using the same platform. New modules can be added to expand the asset classes being processed, or add new processes to a particular workflow. These systems can also be adapted with feedback to users based on an agile methodology, which ensures the development process adapts to the current demands of the business front line.

In the current environment, taking control of the management of middle- and back-office processes is essential in supporting client demand and driving performance. The limitations of outsourced management of back and middle-office solutions combined with the low cost of ownership and enhanced capabilities of newer cloud systems make a compelling case for sell-side firms to take back control. In a rapidly changing and increasingly competitive market, sell-side firms need to act fast to gain an edge – tackling issues in the back and middle-office are a critical element of this fight. Firms must act now or risk falling behind.