Fully integrated middle office
of the market leaders in this space. This is what Trayport has been doing for the past year. Our conclusions are clear, a successful middle office has a few common traits:
• Acts as a knowledge base by being a vital interface between traders and markets
• Focuses on end to end risks across the trade lifecycle , rather than siloed risks within particular areas of responsibility
• A close alignment with the Front Office, not the Back Office
• Agile and unencumbered with day-to-day tasks, problem seekers not process followers
• Uses tools that have been specifically designed for the Middle office
• Some automation to handle the repetitive tasks Related to this, we are finding that currently the
larger financial players in our industry are looking very closely at their operations departments and evaluating the role that vendors bring to them. This appears to be focused around the value that they are getting from different vendors across the trade processing continuum. The feedback we are getting is that if you’re not adding a lot of value then participants will want to remove your technology and build it themselves. If you are adding value, the next level of questioning focuses on whether you’re providing standard product software or covering an area that ought to be a differentiator. This should help focus the vendor community on adding value and not just offering ‘vanilla’ solutions to their existing market. In an ideal world the middle office would be closer to the front
office team than the back office team, and would be identifying issues with trades as only part of their role. Their primary role would be in the integration of risk management into the front office. This is what we are seeing in the companies who have impressed us – providing efficient and integrated information on the positions and portfolio with respect to the exposure to both the market and to counterparties in a timely manner to allow traders to respond before the market moves.
operations allow data integration from multiple sources with effective modelling to be combined with real time data to allow the front office to work on effective cashflow-at-risk and earnings-at-risk to work information alongside value-at-risk information. Even value-at-risk is currently under- utilised with the majority being a very simple Brownian motion Monte Carlo fed VaR. This is typically not suitable for most activities, but used anyway, despite the availability in the market of suitable alternatives. We surmise that one of the reasons that inappropriate risk measurements are
The feedback we are getting is that if you’re not adding a lot of value then participants will want to remove your technology and build it themselves
used, is the workload of the middle office team. Allowing the middle office the time and space to innovate and assist could add tremendous value to any business. If middle office activities are pushed and aligned more to the back office, then you risk the loss of responsiveness of a capable, yet still independent set of risk tools and advisors. A closer bound yet independent middle office team would add enormously to the function of most energy and commodity businesses. Issues with trades would be dealt with immediately, and risk would
June 2012 37
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