Value of Robust Back Office Operations
Tsunami, cataclysm, meltdown – a plethora of superlatives can been used to qualify the news on 14 September that took the financial world by storm. Black Monday revisited. Suddenly all sorts of previously unthinkable catastrophes seem possible.
Frozen credit markets remain big market worry. The US Federal Reserve chief sees the crisis continuing into 2009, while seven central banks simultaneously cut interest rates to shore up financial stability.
The complex set of circumstances that created the crisis is a fascinating story of greed and over-reach at the highest level of the financial system in the US. Global markets appeared to change from rollercoaster to bucking bronco.
All of us have a vested interest in providing the right impetus for operations staff to acquaint and provide guidance and promote robust business practices, accountability and operational risk policy to the largely regulated treasury and capital markets industry, which has become an increasingly important participant in global markets with an estimated US$20 trillion daily turnover.
Controlling risk is one of our key objectives. How can you play your part? One area everyone can influence is operational risk, which includes technology failure, processes, infrastructure and personnel. Operational risk is usually defined as ‘the risk of direct or indirect loss resulting from inadequate or failed internal processes, people or systems or from external events’. The cost of getting it wrong in these areas can be severe. As a result, operational risk is under increasing scrutiny from our regulators, investors, insurers and the board. It is therefore essential that there are adequate and effective frameworks to identify, report, monitor and mitigate these risks.
Figure 1: Identification of Efficient Processes
Currently there is not a common and comprehensive request for proposal (RFP) given by any professional international bodies to set the standards for assessing, monitoring and evaluating the operations department. It is high time that these institutions introduce a common RFP that can be used by everyone to capture operational, credit and market risks.
Any modifications made in the database should be automatically recorded in an audit trail. It should be protected and register all the event attributes, such as a ‘who/when/what’ table, as well as provide the full details.
When we run the end of day (EOD) reports, the reports should be automatically uploaded to report writing tools, such as business objects or customer relationship management (CRM), where the system will pick up the reports and send by email as well as monitor tracking at all levels. If action not taken then it will escalate to the next level.
The systems should be web enabled so that the risk guys can work from anywhere and take immediate remedial actions.
Any excess beyond a certain threshold limit should be automatically escalated and linked to the order routing system of the front office so that the dealers initiate action before the markets make an adverse turn. The systems should make use of the functionality available in major exchanges for reversing the trades.
Process exceptions include:
There should be a proper process for handling these transactions.
No transactions should be booked without the proper sign off of the generic product programme (PPG) from the different stakeholders, such as front office, operations, product control, audit and risk. All stakeholders should agree on their roles and responsibilities and clearly define workflow processes and their job description.
The project manager in charge of migration projects should have a checklist prepared and signed by all stakeholders, agreeing their ownership, roles and responsibilities. When the migration is completed, signoff should be obtained, while any changes in process or ownership at the time of migration or later should be documented and circulated to everybody.
A security management system should contain the following elements:
Just as we have stress and back testing for simulating risk management products, the front and back office and other risk systems should be tested periodically to ensure all exceptions are reported correctly. IT can help in migrating the data from the existing system and warehouse to a system where the testing can be carried out separately.
When the internal or external officials visit for inspection, they may play with the system and change the figures randomly to check how robust the system is. They should also check for the rights and privileges of all users.
As managers increasingly engage in processing sophisticated and high volume cross-border trades, they are advised to adopt a trading and business operations framework that reflects the size and complexity of its activities.
Governments around the world have intervened to prop up the hardest-hit banks in the credit crisis, through cash injections and underwriting interbank loans, supporting the interbank market, guaranteeing customer deposits and injecting short-term lending to help the mutual funds industry meet its liquidity needs. All these factors will trigger a lot of payments messages from the banks to the central banks’ back office systems and vice versa. The back end platform of the central banks should be fully compatible and neutral, providing the flexibility to plug in through any front-end and back end systems they want to, at any time. IT vendors should work closely with central banks to provide critical intelligence and to assure good service and total confidentiality.
Banks and central bank’s systems should now be either upgraded or newly purchased, in order to meet the sudden demand expected. IT vendors should be working to provide their most demanding clients with the best-of-breed solutions they require. This way, the users won’t have to mess around with clumsy external workaround solutions:
Operational departments should be vibrant and have the confidence to take the organisation where it needs to be. The current proposal on blanket ban on bonuses for staff is not something I agree with. Considering the current state of the markets, we will need the best and the brightest operations staff to help navigate the next few months.