Future-Proof Your Firm’s Middle- and Back-Office Operations

May 15, 2024
Read Time: 6 minutes
Unified Data

The true value of a digital transformation for investment firms lies in modernizing their middle- and back-office systems. Modernizing these systems, the backbone of a firm’s operations, can help improve long-term competitiveness, cost-efficiency, resilience, security, and compliance protocols in a constantly changing regulatory landscape.

Modernization requires a deep understanding of existing operations and processes and a clear view of the firm’s strategic direction. Despite potential complexity and cost, bringing these systems up to speed is worthwhile, particularly for firms positioned for growth.

Modernization can lead to greater operational efficiency

Due to the growing acceptance of the need to innovate, demand has increased for ready-to-deploy technology that can harmonize data flows across the front, middle, and back office. Clean and normalized data has the power to optimize processes and empower an institution to make informed decisions – while effectively managing data across business functions – and is critical to maintaining operational efficiency.

Access to comprehensive data across business functions allows teams to nimbly address numerous functions, including 1) ingesting industry-specific metrics and data points; 2) aggregating asset data and ensuring strict governance of the investment lifecycle; and 3) consolidating portfolio data on a single platform to allow for comprehensive oversight.

Opportunities with cloud-based technology

Although it may seem challenging to manage the complexities of the transition to cloud-based processes – particularly in light of increasing regulatory and security issues – these challenges can be reframed as opportunities. As an example, recent regulatory changes – such as the upcoming T+1 settlement rollout in the U.S. – have pressed firms to re-think their current operational infrastructures and workflows. The end result is that efforts to drive efficiency internally can assist a firm’s core efforts to drive alpha.

Readiness will lessen challenges

With T+1 settlement requirements taking effect owing to the SEC’s updated rules, financial institutions will face significant pressure to meet strict deadlines. To accelerate readiness, firms will need to speed up their electronic post-trade communications with brokers and custodians, with an emphasis on accuracy. Post-trade processing has many moving parts and historically, costly errors can happen at any number of junctures. Issues that will need attention include incomplete matching of settlement instructions, the inability to borrow, and the perpetuation of operational and technology issues.

Successful external partnership

While some firms have already been outsourcing their middle- and back-office operations, significantly more are now realizing that many of their functions can be performed more efficiently by forming a relationship with an external partner.

The demand for a more scalable operations model has motivated firms to look at outsourcing as a means of improving operations and reducing reliance on internal teams that may come with risks of attrition, key person dependency, and higher recruitment costs. Market uncertainty is further compelling managers to control costs and reduce variability while creating scale.

There has been a renewed demand for superior talent and technology to help mitigate the impact of potential market uncertainty on firm operations, with an increased emphasis on the drive for real-time transparency into:

  • Operational risk
  • Counterparty exposure
  • Securities exposure
  • Available liquidity

The right outsourcing partner can help connect data across multiple processes, resulting in increased transparency, efficiency gains, and single source of truth through operational standardization. Examples include:

  • Formatting reports consistently, thereby reducing the risk of misstatement and allowing for faster review than under processes that regularly produce a multitude of exceptions.
  • Reducing application and vendor risk by delegating technology hosting to an outside partner, thus minimizing reliance on multiple internal applications.

Motivators for outsourcing

The motivators for outsourcing are many, but several rise to the top: The freedom for firms to focus on their core competencies, access to teams of professionals to help firms optimize their middle- and back-office operations and help build scale, and cost controls. Middle- and back-office outsourcing can help support firms by leveraging the expertise and global presence of their outsourcing partner in a number of areas:

  • Access to expertise in new markets and instruments – A partner with expertise in a wide range of asset classes and geographies can shorten time-to-market when launching new products or entering new regions
  • Support for increased trade volumes and frequency – The right resources and technology enable scale as trading volumes grow
  • Business strategies and objectives – An experienced outsourcing partner should have the expertise to provide insights and recommend solutions to support a firm’s strategies in a dynamic market
  • Investor confidence – A partner well-versed in similar business models can offer managers operational resiliency and reduced risk, thereby increasing investor confidence in managers who make the decision to outsource.

Revving up value

The sometimes forgotten but essential middle and back office are now front and center of the financial industry’s change management plans. For years, firms have been investing in front-office technology to streamline workflows in the face of squeezed trading margins and higher trading costs. But now the focus has shifted to enhancing efficiency by investing in resilient technology for middle & back office that offers faster and more effective processing and takes advantage of the many benefits of partnering with outsourced talent.

With the proper technology and an experienced team overseeing operations functions, benefits and resulting value may include:

  • Reducing excess margin tied up at the counterparty, allowing firms to sweep the excess cash into money market funds
  • Monitoring position allocations across counterparties to minimize margin penalties
  • Resolving financing charge discrepancies with counterparties to ensure firm is not being overcharged
  • Performing reconciliations efficiently to decrease amount of time spent
  • Using high-quality data to avoid failed trades and put together accurate reporting to elude penalties

A resilient middle and back office

Today’s operating models must have the flexibility to adapt to a firm’s changing business needs. The COVID-19 pandemic, for example, caused disruptions in day-to-day operations, the effects of which are still being felt at some institutions, in some cases resulting in a shortage of skilled operations personnel. Outsourcing to a sophisticated partner can provide relief for staffing instability and allow managers to focus on growth strategies. Today, firms are seeking support in areas such as:

  • Lifecycle processing across all asset classes, including publicly traded securities, complex fixed income such as bank debt and distressed debt, illiquid OTC derivatives, real assets, and other static assets
  • Reporting and analysis that can tell the story of what is occurring at the investment level to extract meaningful data that can support better-informed decision making
  • Investment-level forecasting, both in terms of liquidity requirements and scenario planning, to account for varying degrees of market uncertainty
  • Reconciliations that provide oversight over counterparties and administrators while enhancing data quality

Improve operational performance

The ability to collect and optimize data is essential to any firm’s success and growth. Improving operational efficiency and maintaining data integrity while reducing costs is critical. Outsourcing to a proven partner to help harmonize your middle- and back-office processes can move your firm closer to achieving these objectives more quickly and with minimal disruption. It makes sense to work with a technology and service partner with the systems knowledge and expertise to enhance your operations.

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Dirk Fole
Dirk FoleManaging Director, Global Co-Head of Financial Operations

Dirk is responsible for the Service Relationship Management function and the Financial Operations group at Arcesium. Previously, he served as a Vice President in financial operations at the D. E. Shaw group, focusing on valuations, accounting, and operations support across private equity, options, and other asset classes. Prior to that, Dirk served as the assistant controller for Zimmer Lucas Partners, and as an auditor in the alternative asset management division of PriceWaterhouseCoopers.

Education & Credentials

  • Bachelor’s Degree in Accounting, Villanova University
  • Certified Public Accountant

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