This is a research paper about the middle office.
And will start by defining the term middle office and explain the origin of this term and when it was first used. This research paper will also describe the various type of structure, composition, and characteristics of the back, middle and front office. Lastly, it will conclude by stating the significance of middle office and recommend what ought to be done to improve the efficiency and reliability of the middle office.
Keywords: investment banks, front-middle-back office
Middle Office Research Paper
Introduction
Middle office is a term that refers to a team of employees working in a financial services institution whose significant roles and responsibilities involves managing risks, calculating losses and profits. These people also work in the information technology departments of different organizations. Financial services institutions are rationally divided into three sections which involve the front, the middle and the back office.
The front office is composed of various employees such as the corporate finance representatives and the sales personnel. The middle office is made up of the risk managers and the information technology managers who play vital roles in managing various forms of risk and futures uncertainties and maintain and protect the information resources of a financial service institution respectively (BNP Paribas, 2016). The back office is composed of the human resource managers, managers and the customer care representatives who play fundamental roles in providing support, administrative and payment services to customers. Generally, the role of back and middle office involves non- revenue generating operations which are directly related to risk management and ensuring proper execution of transactions (Efinancialcareers, 2018). They also form an essential part of the financial institutional structures.
The history of the term middle office
The history of the term middle office dates back in 1868 during the origin of foreign exchange and investment baking (Tyson, 2017). This was also the period where gold and silver were used as the standard measure of the global monetary system and countries used these two metal when trading with other nations. During this period the term middle office was used to refer to those employees working in the banking and financial institutions whose primary role was to calculate the profits and losses realized after trading with a foreign nation (Ian, 2018). But the meaning of this term changed during the beginning of the First World War after the abolition of gold and the introduction of money in the international market (Ian, 2018). The term investment banking originated in America while in Britain this term was referred to as merchant's bank.
The significant roles of these investment banks were to enable government agencies and firms to raise money through issuing and selling of acquisitions. These banks also played intermediaries role among trading customers. And advised both large, medium-sized and small companies on the potential sectors of the economy to invest their surplus financial resources. Later, investment banks were divided into front, middle and back office and their primary role was to purchase and sell commodities on behalf of the bank or the bank's customers (Tyson, 2017).
The role of the middle office
During the early years of investment banking and foreign exchange, duties were divided between the back, middle and the front office. The front office consisted of various personnel which included the deal makers, traders, and salespeople. And the majority of the staff forming the front office were highly qualified and educated. While those forming up the back office were not highly educated. The middle office has developed for the past decade due to the increase in dynamics and dependence of technology by humankind, making the middle office to split off from the back office. Employees forming the middle office are highly qualified and educated where most of them have masters or undergraduate degree in technology-related fields.
The middle office plays numerous roles in the financial services organizations and the investment banking sectors. These people ensure that deals negotiated during financial transactions are processed, booked and fulfilled. They also manage numerous global agreements concerning business transactions, risk management, and profit and losses. Lastly, they also play significant roles in ensuring that needed defiant documents are completed according to the prior agreements. The information technology middle office is also important in the designing of software that is applied in the trading strategies. They are also involved in the managing of contracted software systems such as Reuters 3000 and Bloomberg that are necessary for trading (Reuters LLC, 2017). The information technology middle office assist both the back and front office by monitoring and capturing the essential market and marketing information.
The role of the front office is to generate revenues and make profits. It is made up of salespersons, researchers, asset managers, brokers, and traders. Currently, the front office utilizes numerous software packages that are used in the tracking and analysis of the markets. The front office is characterized by multiple features which involve high pressure, long working hours and consist of highly paid and educated employees (Franklin, 2017). In investment banking, the middle office is made of the compliance departments, researchers, risk managers, and some technological experts. In this section risk, managers and analysts work hand in hand with the front office groups in matters concerning investment risks and financial markets. The system developers in this section create and maintain various application software that is used by brokers and traders. The middle office also plays essential roles in the financial control of the investment banks by preparing financial statements that are presented to the industry regulators. The middle office is characterized according to its different features which involves numerous responsibilities and challenging negotiations. The back office which is also referred to as the engine room consists of all the duties and responsibilities that are undertaken when the front office is involved in the trading activities. This section plays vital administrative roles to the investment banks. It is also composed of the human resource managers who are involved in recruiting and firing of employees, rewarding and distributing salaries to the employees and handling employees' disciplinary issues. And lastly, back office consists of technology experts who maintain and fix problems concerning the computer systems. It is characterized with long working hours among the employees, employees work to accomplish their assigned targets, and it is an international dynamic since global investment banks link their operations team around the globe when problems arise (Neal, 2017).
Conclusion and recommendation
In conclusion, it is evident that the middle office plays significant roles in the investment banks by preparing financial statements that are presented to the industry regulators. It's also involved in the management of numerous global agreements concerning business transactions, risk management, and profit and losses. And ensures that the needed defiant documents are completed according to the prior contracts. Thus the efficiency and reliability of the middle office must be improved by hiring competent, energetic and enough number of employees in this section since it plays a vital to the investment banks.
References
BNP Paribas. (2016, December 16). Optimizing the middle office - questions to consider. Retrieved from https://securities.bnpparibas.com/insights/middle-office-questions.html
Efinancialcareers. (2018, May 5). What's the front office, the middle office and the back office in an investment bank? And does it matter? Retrieved from https://news.efinancialcareers.com/uk-en/246493/front-office-middle-office-back-office-banking
Franklin, B. (2017, May 10). Investment Bank Organizational Structure. Retrieved from https://www.wallstreetprep.com/knowledge/investment-bank-organizational-structure/
Ian, K. J. (2018, November 2). History Of The Forex. Retrieved from https://www.investopedia.com/walkthrough/forex/beginner/level2/history.aspx
Neal, C. J. (2017). Front Office " Back Office: What is the difference? | AllAboutCareers. Retrieved from https://www.allaboutcareers.com/careers-advice/looking-for-a-job/front-office-back-office-what-is-the-difference
Reuters LLC. (2017). "Reuters 3000 Xtra" on Revolvy.com. Retrieved from https://www.revolvy.com/page/Reuters-3000-Xtra
Tyson, B. (2017, June 16). Brief History of Investment Banking from Medieval Times to the Present - Oxford Handbooks. Retrieved from http://www.oxfordhandbooks.com/view/10.1093/oxfordhb/9780199658626.001.0001/oxfordhb-9780199658626-e-8
