With the primary role of asset owners and managers to maximise returns, more of them are partnering to develop efficient and effective behind-the-scenes investment operations, writes BNP Paribas Securities Services' Justin Burman.
What used to be limited to back-office functions has today expanded to include middle and even the front office.
Most people in business are familiar with the concept of the ‘front office’ which markets, sells and serves customers and the ‘back office’ that fulfils demand and handles operations.
In-between is an area of middle-office functions that are a combination of both and requires knowledge, experience and analysis to assess situations and make decisions.
In the investment industry, this can include performance reporting, risk analysis and management, collateral management, securities lending, product management and development, pricing, data management and other ‘knowledge’ functions.
The middle office is also an area where asset owners and managers can help drive performance and efficiency as well as make a difference vis-à-vis their competitors.
However, while many asset owners and managers have contracted back-office operations some have been a little more reticent to do the same with their middle office.
‘Right-sizing’ middle-office resources
As the middle office isn’t as aligned with revenue-generating activity as the front office, it often receives less senior management attention and funding.
This has meant that often the middle office is one of the first places where resource cuts are made in an attempt to lower operating costs.
This leads to underinvestment in middle-office functions, resulting in an infrastructure that is inflexible and unable to scale for increasing product complexity and regulatory requirements.
An unintended consequence was that this sometimes also tended to result in an associated increase in operational and reputational risk as manual systems errors increased as too many resources spent too much time managing volumes of data, while the ability to quickly respond to regulatory bodies and demands from customers for transparency was severely strained.
Management needs to transform the middle office into a contributor. An efficient middle office can streamline compliance with regulators, meet client and regulatory demands for transparency and future-proof operating models for these changes.
We see leading asset owners and managers changing the role of their middle office from that of a transaction processor to that of a strategic function.
Over the past few years, Australian funds and investments managers have embraced the trend to partner with their third-party providers and the benefits of long-term partnerships mean they are able to focus on their core business.
Partnering frees up management from middle-office activities and allows them to focus on the core aspects of their business: front-office strategy and trading, which provides the firm and its clients' distinct value, and on critical relationship management and member engagement issues.
Middle-office development is a two-way street
We are seeing more local asset managers interested in partnering with third-party providers for their middle-office operations as they expand beyond their local market.
Also managers look to a service partner to support not just their operational needs but expertise in regulatory updates, reporting and analytics.
We work towards providing co-creation and innovation of scalable and flexible technology, coupled with greater sophistication of data management and long-term partnership to provide seamless alignment between front, middle and back offices that benefits asset owners, managers and their end investors.
Justin Burman is head of product management at BNP Paribas Securities Services in Australia.