The middle office is often considered a drag on efficiency, but BNP Paribas Securities Services’ Nicolas Le Clech writes that when used correctly, it’s a powerful tool for any asset manager.
Historically, many asset managers have seen the middle office, which includes performance reporting, validation and reconciliation, and data analysis, as an expense drain requiring constant IT and regulatory upgrades, while adding little to business performance.
That perception is changing. Today, asset managers are discovering that a well-managed middle office can add real value to their organisation.
Instead of holding all the complexity, operational risk and fixed costs in-house, partnering with an asset servicing provider can help institutions adapt to regulatory change, take advantage of technological innovations and actively facilitate the front office’s objectives.
As a result, middle office outsourcing deals are becoming increasingly prevalent.
One reason is that as asset managers and owners in Australia have grown and matured, so too has their operational complexity and cost.
By outsourcing, asset managers can transform that heavy internal fixed cost burden into a variable cost and be better positioned to cope with industry fee compression trends.
Similarly, new regulations have come into effect in recent years and more changes loom. The onerous task of complying with these shifting rules falls largely on the middle office, which may have to develop new expertise, infrastructures and processes to cope.
Meeting these reforms is just one of many major challenges and is costly, difficult and time consuming for in-house teams and detracts focus from a firm’s strategic goals.
Also, as regulations vary from market to market. Asset managers seeking to expand their geographic reach therefore face an exponential increase in the complexity of their middle office set-up. As a result, there is a clear incentive to leverage the expertise of providers who have the global operating platforms, processes and experience, and thereby alleviate the burden.
As well as moving into new territories, many asset managers are keen to exploit opportunities to expand into different asset classes and instruments. But while they might have the front office product expertise, they may lack the middle and back office capabilities to support the operational complexity and consistent way of evaluating their asset classes.
Middle office processes have become complex and specialised that they require considerable time and investment to keep up with ever-changing best practices.
For example, recent advances in data visualisation technology enable specialised middle office providers to go beyond providing the basic account reports.
They can provide interactive, customisable data tools that cut through complexity, expose anomalies and inform decision-making.
A recent BNP Paribas whitepaper, 'Middle Office Outsourcing: from Experiment to Strategic Imperative', notes “The most important driver of the outsourcing of investment operations on the buy-side can be summed up in one phrase: the need to manage complexity.
“This is commonly represented by the proliferation of data and increasingly onerous reporting requirements, not only as asset owners demand more timely information on performance, but as regulations mushroom.
“Reporting to various stakeholders is increasingly the most onerous burden that buy-side institutions are seeking to outsource.
“This encompasses not just operational reporting, to internal managers and the board, but also the aggregation and management of data to report externally to clients and regulatory authorities.
“For the former, the number of possible dimensions of data, on asset valuation, process monitoring, performance analytics, market status and so on, compounds the potential complexity.
“To take just one example, under new Markets in Financial Instruments Directive transparency rules the fields of data required to be reported expanded from 23 to approximately 70.
“Interoperability and harmonisation will be crucial for buy and sell-side institutions that need to share information globally and create a balanced approach between centralising core functions and enabling local flexibility.
“Outsourcing aspects of the middle office is one step on the road to such functionality and is increasingly a strategic imperative.”
Accordingly, today, with the right partnership the middle office can become a powerful tool that enables asset managers to manage complexity, handle change and grow their business.
Nicolas Le Clech is head of product and transformation at BNP Paribas Securities Services Asia Pacific