Main functions of a back office are:
- Deal slip verification
- Setting up of Standard Settlement Instructions (SSI)
- Deal affirmation
- Confirmation drafting (manual / automated)
- Exchanging confirmations with counterparties
- Ensuring ISDA agreements are executed (International Swaps and Derivatives Association = ISDA)
- Monitoring receipt of confirmations from counterparty banks
- Monitoring receipt of confirmations from forward contracts and derivatives
- Making payments and ensuring counterparties make payments on time (receipts)
- Settlement through CCIL (Clearing Corporation of India Limited) or direct through NOSTRO or RTGS as applicable
- Statutory reporting to regulatory authorities
- Accounting
Dealers enter the deals into their system in the front office – the same is passed on to all the departments either through the same platform or each of the different platforms talk to each other (are connected to each other) and information is passed on seamlessly between all these platforms, making sure all the departments have the information on ‘need to know’ basis.
Computerization of Investment and Fund operations is absolutely necessary as some of the risk return models can be implemented only through software packages. This will also facilitate the introduction of risk-hedging techniques.
Consistent improvement of skills is a must for the Treasury Manager, dealers and other operations staff to take care of market risk, as market moves at a rapid pace, settlement, confirmations, etc. Hence, Banks / corporate houses send their staff on training / conferences on a regular basis. Some also have employee rating with an element of training / conference attended in a year. Most banks / corporate houses also encourage their staff to teach at management colleges as this also ensures that the staff is having latest and adequate knowledge.
These days with most functions being outsourced, the front office may still be overseas while the back office could easily be in Mumbai or Bangalore (any other country). Even if the front office are in the same city, back office could be in a low rent-cost area (area where the rent is on the lower side). This could make sense as clients do not walk into Back office areas usually, unless they have specifically come to see the set-up. But the clients do walk in to see the front office set-up. Hence it makes sense to have the front office in a good locality.
Confirmations are drafted or are auto-generated, most commodity derivative confirmations are still drafted manually – one of the most highly paid job in the UK (slowly being outsourced)
Confirmations are exchanged with counterparties on the same day and each counterparty ensure to receive the confirmation from the other party. Both the parties check the confirmation for accuracy of contract, as these are legal documents.
In case the ISDA agreements are not signed, a long-form confirmation is exchanged. A long form confirmation has most of the clauses since the ISDA is not yet signed, a long form must contain these clauses. Once the ISDA agreement is executed, the long form confirmation need not be exchanged. A normal deal confirmation is exchanged which has specific reference to the ISDA executed between the parties.