Back office Operations
The mainstream role of the back office is in direct support of the dealing room or front office. Traditionally, this included the input of deals written and authorized by traders, checking of deal input details, verification by confirmation, settlement, checking existence of a valid and enforceable International Swap Dealers Association (‘ISDA’) agreement and reconciliation of nostro accounts. However, with the advent of online data capture systems and, more importantly, online trading systems, the input of deals has progressively moved to the dealing room as mentioned above.
An important development in the back office has been the advent of straight-through processing (STP), also called ‘hands-off’ or exception processing. This has been made possible through enhancement of to real time online input in the trading platform, which in turn has meant that the back office can recall deals input in the trading platform to verify from an external source. In practice this is done automatically, comparing incoming data from brokers and counter parties and investigating exceptions. Indeed, with the introduction of full trading systems, the deal is ‘confirmed’ as it is done, allowing the back office to concentrate principally on exception reporting, settlement and monitoring and risk control. This is a completely different approach to the old style input and checking of written paper-based deals that represented only a dealer’s version of what the deal was before external verification could even commence.
One of the basic tenets for a treasury area in a bank is the strict segregation and allocation of duties between the front and back office, the latter controlling confirmations, settlement and accounting of transactions. These rulings are even more important in an era of straight-through processing where the checks are fewer and must essentially be independent. However, while this is straight forward for the processing functions, the independent monitoring and management of complex trading risks can be much more problematical, requiring the ability and market knowledge to understand how the trades and hedges in the dealer’s book are structured.