Main functions of a back office are:
- Deal slip verification
- Setting up of Standard Settlement Instructions (SSI)
- Deal affirmation
- Confirmation drafting (manual / automated)
- Exchanging confirmations with counterparties
- Ensuring ISDA agreements are executed (International Swaps and Derivatives Association = ISDA)
- Monitoring receipt of confirmations from counterparty banks
- Monitoring receipt of confirmations from forward contracts and derivatives
- Making payments and ensuring counterparties make payments on time (receipts)
- Settlement through CCIL (Clearing Corporation of India Limited) or direct through NOSTRO or RTGS as applicable
- Statutory reporting to regulatory authorities
- Accounting
Dealers enter the deals into their system in the front office – the same is passed on to all the departments either through the same platform or each of the different platforms talk to each other (are connected to each other) and information is passed on seamlessly between all these platforms, making sure all the departments have the information on ‘need to know’ basis.
Computerization of Investment and Fund operations is absolutely necessary as some of therisk return models can be implemented only through software packages. This will alsofacilitate the introduction of risk-hedging techniques.
Consistent improvement of skills is a must for the Treasury Manager, dealers and other operations staffto take care of market risk, as market moves at a rapid pace, settlement, confirmations, etc. Hence, Banks / corporate houses send their staff on training / conferences on a regular basis. Some also have employee rating with an element of training / conference attended in a year. Most banks / corporate houses also encourage their staff to teach at management colleges as this also ensures that the staff is having latest and adequate knowledge.
These days with most functions being outsourced, the front office may still be overseas while the back office could easily be in Mumbai or Bangalore (any other country). Even if the front office are in the same city, back office could be in a low rent-cost area (area where the rent is on the lower side). This could make sense as clients do not walk into Back office areas usually, unless they have specifically come to see the set-up. But the clients do walk in to see the front office set-up. Hence it makes sense to have the front office in a good locality.
Confirmations are drafted or are auto-generated, most commodity derivative confirmations are still drafted manually – one of the most highly paid job in the UK (slowly being outsourced)
Confirmations are exchanged with counterparties on the same day and each counterparty ensure to receive the confirmation from the other party. Both the parties check the confirmation for accuracy of contract, as these are legal documents.
In case the ISDA agreements are not signed, a long-form confirmation is exchanged. A long form confirmation has most of the clauses since the ISDA is not yet signed, a long form must contain these clauses. Once the ISDA agreement is executed, the long form confirmation need not be exchanged. A normal deal confirmation is exchanged which has specific reference to the ISDA executed between the parties.
1.2d Automation:
This is a key department and one that is close to Treasurer’s / CFOs heart. Most errors occur due to manual mistake (human error). The more number of manual touch points, the more the probability of human mistakes. Hence to avoid this manual intervention and human errors, most activities have to be automated – STP (Straight-through Processing).
Due to this reason, the automation department (also known as the Projects team) is always on the move – they need to evaluate each and every process – each and every activity and with ever changing technology and regulations, they need to access the risk on a regular basis with every change. They also need to suggest changes / automations in every process. Each process needs to be evaluated with microscope to further enhancements.
Because of the above, the treasurer or the head of the back-office (under direct supervision from the treasurer) keep this department under him. So they can closely monitor suggestions, get project approvals for automation / new technology implementation / risk mitigation and timely action.