Wednesday, April 16, 2014


The Middle Office evolved as a result of various issues facing Sell-side firms. Two issues, in common, to these firms were:

1.     a need for additional controls to improve the accuracy of the trade details at the beginning of the trade lifecycle

2.     the need to identify and resolve issues causing trade settlement delays

The response was to establish a function that would be closer to the front office, where client facing activities tak place, than the traditional back office. That’s how the name Middle Office came to be and has stuck.

Eventually buy-side firms, as well as other industry service organizations, also established a middle office function as well. This allowed each to functionally match-up to broker/dealers, custodians and prime brokers. Over time the focus of the Middle Office grew to include accounting, reporting and other control activities. The role of the Middle Office has improved operational efficiencies, reduced the cost of resolving delayed and failed trade settlements.

As the time between trade and settlement date shrinks, the Middle office may again prove to be an essential function in maintaining operational efficiency.  The reduction of time between trade and settlement date results in less time to resolve problem trades. This loss of time will require firms to rethink existing internal practices to ensure that there is sufficient time to identity, analyze the cause and resolve the issues that may delay timely and accurate settlement.

Today resolution of problem trades often requires interaction across various front, middle and back office areas. This can take a considerable time and may result in settlement delays. A shortened trade-settlement schedule may result in an increase in unresolved trades. This will have a negative impact on settlement and post settlement activities plus increase operating costs.  One approach might be to reduce the number of departments or staff involved in trade and settlement processing.

Restructuring operational responsibilities is one alternative to consider. Perhaps moving the activities associated with pre-settlement and settlement, now performed by the Back Office, to the Middle Office may be worth a review.

A new infrastructure might include reassigning functions between the Middle ad Back Office areas as follows:

1.     Middle Office – all post order(trade) execution through settlement functions

2.     Back Office – all post settlement through to asset servicing functions

This change is a huge leap from the structure that has been in-place for years. It is similar it to the introduction to technology in the 1960’s which resulted in new work flows, new departments and procedures. Technology continues to support the business and the impact is the same, with slight variations and the evolving changes are accepted as (business as usual.  

This is one approach. There is sufficient time for the industry to ponder the impact of reducing the trade-settlement and explore appropriate responses.

         Do you agree that this is a situation we will face?
                Is splitting functions between Middle and Back Offices viable? 
                     Can you offer alternative responses?