Is it time for the spotlight to fall on the back office?
Article for Global Banking & Finance Review
London, 27 February 2012 — Calls for greater unification of Europe’s fragmented securities market and the introduction of centralised counterparties for exchange-traded or OTC derivatives is focusing more attention on middle and back office operations. In these unpredictable economic times, regulators, brokers, bankers and clients alike are concerned to reduce risk and accept the inevitable increase in controls this entails.
The financial markets have become so fragmented with increasing numbers of trading venues, centralised counterparties and rules, that middle and back office costs and efficiencies are under scrutiny more than ever before. The buy-side and sell-side want to see middle and back office systems work harder to deliver efficiency with higher rates of straight-through processing and are recognising the role these systems can play in delivering one version of the ‘truth’ or one consolidated view of business performance and exposure to risk. At the same time there is pressure to reduce middle and back office costs and support the front office with improved operational efficiency, simplified regulatory compliance, better client service and control.
The front office has long been the “glamour” end of the business. Massive investments in technology to support innovative trading strategies have been made with ultra-low, single digit microsecond latency for market data capture and order execution being the goal. Volumes have risen too. For example over-the-counter derivatives climbed 18 percent to $707.6 trillion by the end of June 2011 compared to the previous six months, according to the Bank of International Settlements November 2011 report. The range of front office systems has also proliferated with best of breed systems chosen for the different instruments, data feeds and exchanges they support.
In contrast many back office clearance and settlement systems have been around for decades – also often dedicated to a particular or limited range of instruments. For example a global investment bank or broker may use one system for domestic equities another for international and perhaps another for fixed interest, FX or derivatives. Bringing together or unifying the data resident in these disparate systems or silos has become an urgent imperative for improving the management and control of the business.
Brian Collings, Chairman & CEO of newcomer Torstone Technology which recently introduced Inferno — claimed to be the first major system for post-trade securities and derivatives processing to be launched in the last ten years — confirms that the middle and back office is warranting more attention. He said: “People are asking has it now become more cost-effective for the back office to invest in one application that can address all our needs rather than maintain disparate solutions? The pressure is also on back office systems to take information from the wide range of specialist front office trading systems and provide a comprehensive, cohesive view of business performance and exposure to risk.”
Torstone Technology may be a new company but the Inferno system has been widely deployed and proven to support highly complex, structured credit and equity derivatives as well as high volume equity products. The software was originally developed in-house for a statistical arbitrage application where volumes in the hundreds of thousands surpassed the capabilities of the incumbent back office system. Over time additional systems within the bank were replaced as more functionality was added to Inferno. The management team behind Torstone reached an agreement with the KBC Group on a management buy-out of the software and the development/support team. The new business is supporting existing clients in New York, Hong Kong and London.
Torstone’s Inferno includes enterprise-level clearing, settlement and integrated accounting; support for multi-asset, multi-currency and multi-location operations, including high frequency trading and provision of real-time event-driven settlement status and trade accounting. Delivered as software-as-a-service (SaaS) to help reduce costs by avoiding a capital outlay on systems, asset classes already processed by the system include equities, fixed income, convertible bonds, warrants and fx, as well as a wide range of derivatives products in the areas of credit, equity, funds and insurance. According to Torstone, Inferno offers an unprecedented depth of control and discipline which was instilled by industry accountants who helped design the software and who understand the consequence of trading decisions.
Torstone is targeting regional and mid-sized investment banks, asset managers, hedge funds and brokers with the new system, but how does it distinguish itself from the other longstanding systems in the market? “Inferno was born out of the shortcomings and inflexibility of other settlement systems to meet the processing requirements of a wide range of instruments, complex trades, multiple venues and the demands of very high volumes,” Collings said. “We distinguish ourselves from the competition in three key areas. First is breadth of product and the sheer scope of Inferno to handle a wide range of instruments, both simple equities and complex derivatives. Second is the depth of discipline from the middle office to operations, clearing, settlement, global accounting with real-time consolidation of data from multiple front office systems including Fidessa, Murex, Sungard and Sophis. Third is the capability to process very high volumes, including high frequency trading.”
As well as designing the software, those same industry practitioners and a multi-disciplined team of developers and accountants also support the product, which Collings believes also gives the firm an edge: “We are able to deliver very high standards and quality of service rooted in a deep practical knowledge of settlement and trade accounting so are able to solve business as well as technical issues. In terms of on-going costs the modern web service-based software architecture supports rapid deployment of new business rules and incremental upgrades, making the system highly flexible. The ease of use reduces the need for and higher cost of super users and the speedy resolution of failed trades also supports a slimmed down back office.”
“Complex products can cause difficulties for other systems,” Collings continued. “No-one yet knows where or what will emerge as the next complex market, but we aim to make it easier for firms to participate at an early stage, not be constrained by inflexible systems and be equipped to rationalise settlements on a global basis.”
As the need for cost-cutting continues, the back office not only must clearly demonstrate its efficiency but also its ability to support less risky business decisions.