As the FinTech industry continues to thrive and regulators require more transparency, banks and other large financial institutions are beginning to look more like technology companies. Information technology (IT) is rapidly transforming from a support function – often considered an after-thought – into a group critical to a bank's market competitiveness. The industry is increasing its reliance on data and information systems to improve trading strategies, reduce regulatory and operational risk, and cut costs. As is the trend across all industries, systemization and automation will be key to meeting these three goals in the coming years.
Data and technology-driven front offices have not only increased revenue opportunities, but have also opened the door for new cost-cutting measures in middle and back office functions. Systematic trading means more potential for systematic reporting, accounting, risk management, collateral management, settlements, and all other components of the trade lifecycle. A costly support department for many financial institutions is their middle office; but luckily – with technology aimed at improved STP (straight-through processing) and automation – the opportunity to reduce this cost is clear. While many third-party companies are cropping up to do just this, many large banks are choosing to build technology in-house to meet their specific needs.
Middle office transformations can have outsized benefits for an organization, but this can be accompanied with some risk. As with all systemization and automation initiatives, organizations must take the time up front to ensure a sustainable and impactful solution is being built to meet current and future goals. Missed requirements, poor engineering, incomplete documentation, and poor data quality can lead to systematically poor outcomes. These outcomes could expose an organization to even more operational and regulatory risk than previously experienced if reports are incorrect, trade booking is not handled properly, or regulators are misinformed.
In addition to the current risk potential, future needs and challenges should be considered as well. Often, organizations will engineer a solution to meet current demands only to find it outdated upon completion. This can be avoided by ensuring that solutions are dynamic and configurable enough to adapt to the ever-changing needs of traders, regulators, and clients. Maintaining flexibility as a top priority throughout engineering will ensure that a systemized solution enables a more rapid response to a changing industry landscape than would ever be feasible in a manual world.
Even organizations that currently have an automated middle office in place could stand to reexamine its flexibility. Technology that has satisfied past needs may not be sufficiently dynamic to meet future needs. Middle office executives should consider stress tests on their systems to determine if investment in technology enhancements would make sense. Too much comfort with existing infrastructure can lead to a lack of preparedness to meet future requirements, as well as technology atrophy .
Despite the risks associated with migrating to a dynamic automated solution, businesses need to consider automation and systemization solutions to remain competitive. Financial institutions with a systematic middle office solution should expect to see fewer "fat-finger" errors, improved reporting flexibility, more robust data integrity checks, and a lower headcount requirement.
More importantly, creating a systemized middle office to accompany an already systemized front office is a step toward a front-to-back trading ecosystem. This industry trend is evident as companies such as Bloomberg – which traditionally offered front office solutions – are beginning to offer more middle and back office technology. Front-to-back connectivity has clear benefits with regards to data consistency, technology serviceability, trader productivity, and operational and regulatory risk. Institutions can set aside their concerns around mistranslation of data into middle and back office systems and focus on utilizing real-time market data along with real-time P&L and risk metrics to assess performance and improve trading strategies.
The value in this front-to-back connectivity is so clear that financial services institutions are beginning to sell this as a stand-alone service. What was previously viewed as a support organization is now becoming an opportunity for revenue. D.E. Shaw spun off its middle and back office into Arcesium in 2015, a product offering of middle and back office solutions for asset managers. According to Arcesium's website, it now handles over $65 billion in assets. Similarly, JP Morgan's Middle Office Services offers asset managers access to their sophisticated middle office platform. These are two examples but more exist – including BNP Paribas, State Street, and BlackRock to name a few. These companies chose to invest in sufficiently high-quality middle office systemization and automation technologies to enable this support department to not only become self-funded but also profitable.
As IT services continue to become an integral part of the financial industry, forward-thinking organizations will adopt front-to-back platforms employing systemized middle office solutions. In these changing times, Monticello Consulting remains at the tip of the spear by guiding clients through the transformation process from analysis to implementation. Visit our website to learn more about industry trends and MCG's involvement in delivering automated platforms for sustained business growth.
 Technology requires regular maintenance and investment to ensure continuing usability to meet current demands. Technology atrophy refers to the degrading quality of technology over time with lack of investment and resource allocation.