report in elective II

1. CHAPTER ICHAPTER I
An OverviewAn Overview

2. Back officeBack office
 Is usually located behind the trading room,Is usually located behind the trading room,
but the work that is performed there hasbut the work that is performed there has
changed considerably, evolving farchanged considerably, evolving far
beyond just processing into a totalbeyond just processing into a total
support role for the dealing functions.support role for the dealing functions.

3. Need to make back office efficiencyNeed to make back office efficiency
 Increasing regulation and complianceIncreasing regulation and compliance
requirements, risk management needsrequirements, risk management needs
and interactive system development.and interactive system development.

4.  Treasury operations has grown into one ofTreasury operations has grown into one of
the key administrative areas of financialthe key administrative areas of financial
institution, responsible for the processinginstitution, responsible for the processing
of all financial market transactions andof all financial market transactions and
usually much more, including a crucial roleusually much more, including a crucial role
in the control of risk.in the control of risk.
 Modern international banks have a largeModern international banks have a large
daily turnover in numerous currenciesdaily turnover in numerous currencies
from treasury transactions which result infrom treasury transactions which result in
high value payment and receiptsin manyhigh value payment and receiptsin many
centers.centers.

5.  An important development in the backAn important development in the back
office has been the advent of straightoffice has been the advent of straight
through processing (STP) also calledthrough processing (STP) also called
hands- off or exception processing. Thishands- off or exception processing. This
has been mad possible through systemhas been mad possible through system
advances of real time on line input in theadvances of real time on line input in the
trading room, which in turn has mean thattrading room, which in turn has mean that
the back office can recall deals input in thethe back office can recall deals input in the
trading room to verify from an externaltrading room to verify from an external
source.source.

6. Flexible ControlFlexible Control
 A key concept for the head of a treasuryA key concept for the head of a treasury
operations unit.operations unit.

7. Two perspectivesTwo perspectives
 First is summed upFirst is summed up
saying, the bottomsaying, the bottom
line is that the bankline is that the bank
has to do businesshas to do business
otherwise it is out ofotherwise it is out of
businessbusiness
 Second perspectiveSecond perspective
on flexible control ison flexible control is
making sure that themaking sure that the
right amount ofright amount of
attention andattention and
response is given inresponse is given in
proportion to what isproportion to what is
really required.really required.

8. Two Obvious PrioritiesTwo Obvious Priorities
 Good on- going control ofGood on- going control of
payments authorization,payments authorization,
ensuring prompt follow up toensuring prompt follow up to
confirmation and reconciliationconfirmation and reconciliation
exceptions.exceptions.
 Efficient housekeeping for theEfficient housekeeping for the
standing data tables in thestanding data tables in the
database of the variousdatabase of the various
systems, which may be in usesystems, which may be in use
in any given bank. Anin any given bank. An
important accounting relatedimportant accounting related
priority is the protection of thepriority is the protection of the
integrity of the systems in useintegrity of the systems in use
by making sure that staff reportby making sure that staff report
systems problems through asystems problems through a
normal procedure to thenormal procedure to the
support unit via treasurysupport unit via treasury
operations line management.operations line management.

9. Cash ReconciliationCash Reconciliation
 Is another function where the head of theIs another function where the head of the
back office just keep the tightest control.back office just keep the tightest control.
 Modern Technology may have removedModern Technology may have removed
the input and routine checking of servicethe input and routine checking of service
and reduction in costs, but this has beenand reduction in costs, but this has been
more than offset by increased complexitymore than offset by increased complexity
in day-to-day operation.in day-to-day operation.

10. Introducing the Core FunctionsIntroducing the Core Functions
The mainstream role of the back office isThe mainstream role of the back office is
in direct support of the trading room orin direct support of the trading room or
front office. Traditionally this included thefront office. Traditionally this included the
input of deals written and authorized byinput of deals written and authorized by
traders, checking of input, verification bytraders, checking of input, verification by
confirmation, settlement and reconciliationconfirmation, settlement and reconciliation
of nostro accounts as soon as possible.of nostro accounts as soon as possible.

11. Input and CompletionInput and Completion
 The first core function for the back office isThe first core function for the back office is
to recall the deal through the input systemto recall the deal through the input system
and decide what has to be done toand decide what has to be done to
complete the details of the deal.complete the details of the deal.

12. Verification by ConfirmationVerification by Confirmation
Provided the input is accurate , the tradersProvided the input is accurate , the traders
immediately benefit from online positionsimmediately benefit from online positions
and maturity ladders. This is furtherand maturity ladders. This is further
enhanced by the facility toenhanced by the facility to
manipulate/interpolate the outstandingmanipulate/interpolate the outstanding
book with many charting an analyticalbook with many charting an analytical
tools.tools.

13. The second core function for the processingThe second core function for the processing
support unit is to verify the ideal from an externalsupport unit is to verify the ideal from an external
source as soon as possible after the transactionsource as soon as possible after the transaction
has been done. For bank-to-bank trading, thehas been done. For bank-to-bank trading, the
verification can take the form of a confirmation ofverification can take the form of a confirmation of
a deal done through the Reuters 2000 or EBSa deal done through the Reuters 2000 or EBS
trading systems, or a broker’s confirmation viatrading systems, or a broker’s confirmation via
Barts 3if the deal has been done through aBarts 3if the deal has been done through a
broker. It can also be a confirmation from thebroker. It can also be a confirmation from the
counterparty, normally via SWIFT, which will becounterparty, normally via SWIFT, which will be
matched automatically using Accord or a similarmatched automatically using Accord or a similar
inhouse3 matching system such as TRAMinhouse3 matching system such as TRAM
(transaction matching system).(transaction matching system).

14. SettlementSettlement
 The third core function in the processing chain isThe third core function in the processing chain is
that of settlement. This can take the form of athat of settlement. This can take the form of a
clean currency payment/receipt at the banksclean currency payment/receipt at the banks
agency accounts.agency accounts.
 The initiating bank, accounting entries andThe initiating bank, accounting entries and
reporting are created from the one commonreporting are created from the one common
events file. An important corollary to theevents file. An important corollary to the
payment process is that the deal may be onepayment process is that the deal may be one
included in a netting arrangement with theincluded in a netting arrangement with the
counterparty.counterparty.

15. ReconciliationReconciliation
 Operations areas are typically involved in aOperations areas are typically involved in a
number of reconciliation processes including thenumber of reconciliation processes including the
agreement of trader’s overnight positions,agreement of trader’s overnight positions,
nostro accounts and brokerage.nostro accounts and brokerage.
 The basic reconciliation function is to agree orThe basic reconciliation function is to agree or
reconcile the entries that have passed over anreconcile the entries that have passed over an
account with an agent bank against those thataccount with an agent bank against those that
have been passed internally in the books of thehave been passed internally in the books of the
bank to a nostro account. (The word ‘nostro’bank to a nostro account. (The word ‘nostro’
simply means’ our account with them’)simply means’ our account with them’)

16. In summary, the core functions ofIn summary, the core functions of
the back office are:the back office are:
 Input (where necessary) and completion ofInput (where necessary) and completion of
details of deal;details of deal;
 Verification of deal by both inward and outwardVerification of deal by both inward and outward
confirmations;confirmations;
 Settlement of the deal depending on the eventSettlement of the deal depending on the event
which may also include netting;which may also include netting;
 Reconciliation of nostros, positions, books.Reconciliation of nostros, positions, books.
These functions are vital to the ongoing viability ofThese functions are vital to the ongoing viability of
the bank.the bank.

17. The Back Office can alsoThe Back Office can also
includeinclude

18. Risk ManagementRisk Management
 This function can sit well in the back officeThis function can sit well in the back office
if staffed by officers specifically ex-marketif staffed by officers specifically ex-market
practitioners.practitioners.
 It can range from agreeing overnight cashIt can range from agreeing overnight cash
positions for the trading room through topositions for the trading room through to
full-risk modeling associated withfull-risk modeling associated with
derivatives trading and hedging.derivatives trading and hedging.

19. Treasury accountingTreasury accounting
 This unit acts as an intermediary betweenThis unit acts as an intermediary between
the treasury business unit and the financethe treasury business unit and the finance
department to ensure that the accountingdepartment to ensure that the accounting
of treasury products is accurate andof treasury products is accurate and
correct.correct.

20. DocumentationDocumentation
 This can range from simple customer mandatesThis can range from simple customer mandates
through to full legal documentation with boththrough to full legal documentation with both
banks and customers.banks and customers.
 Originally this area can be viewed in similar wayOriginally this area can be viewed in similar way
to the accounting function. If documentationto the accounting function. If documentation
forms part of the back office then the businessforms part of the back office then the business
will be more understood by management andwill be more understood by management and
better controlled as a result.better controlled as a result.

21. Financials, analysis, budgets,Financials, analysis, budgets,
regulatory reportingregulatory reporting
 Depending on the size of the business unit, aDepending on the size of the business unit, a
small financial section allows the treasurysmall financial section allows the treasury
business head to have a hands-on role for allbusiness head to have a hands-on role for all
financial aspects of the business.financial aspects of the business.
 In an ideal world, the suite of reports required byIn an ideal world, the suite of reports required by
the regulators would be entirely systemthe regulators would be entirely system
generated and require no intervention.generated and require no intervention.

22. Systems and TelecommunicationsSystems and Telecommunications
 This is possibly the most problematical area forThis is possibly the most problematical area for
the treasury back office.the treasury back office.
 Although rapid technological change andAlthough rapid technological change and
straight-through processing have cut throughstraight-through processing have cut through
traditional boundaries of responsibility, it is stilltraditional boundaries of responsibility, it is still
necessary for one area to be accountable for thenecessary for one area to be accountable for the
total system requirements for a treasury unit tototal system requirements for a treasury unit to
function efficiently and indeed to avoid chaos onfunction efficiently and indeed to avoid chaos on
the network or switching system supportingthe network or switching system supporting
traderstraders

23. Systems and telecommunications
Regulatory reporting
Financials,analysis, budgets
Documentation
Treasury accounting
Risk management
1. Input and completion
2. Verification by confirmation
3. Settlement
4. Reconciliation
The Treasury back officeThe Treasury back office

24. ResourcesResources
 Traditionally, traders were regarded asTraditionally, traders were regarded as
highly specialized staff, supported byhighly specialized staff, supported by
competent personnel in the back office.competent personnel in the back office.
 Nowadays, as complexity increased, highNowadays, as complexity increased, high
quality, specialized people are needed inquality, specialized people are needed in
both the dealing room and the back office.both the dealing room and the back office.

25. DateDate NameName CauseCause LessonLesson
19741974
BankhausBankhaus
Herstaff,Herstaff,
CologneCologne
Losses inLosses in
foreignforeign
exchangeexchange
Delivery orDelivery or
settlementsettlement
time zonetime zone
riskrisk
19661966
HammersmitHammersmit
h andh and
Fulham localFulham local
Interest rateInterest rate
swaps lossesswaps losses
Dealing ultraDealing ultra
vires/vires/
documentatiodocumentatio
nn
19951995
BaringsBarings
Bank,Bank,
singaporesingapore
Futures andFutures and
options indexoptions index
tradingtrading
losseslosses
SegregationSegregation
of duties/of duties/
managementmanagement
controlcontrol
The treasury back office: what can go wrong?The treasury back office: what can go wrong?