Back office activities, such as clearing and settling trades and accounting procedures, are separate from front office trading activities. However, some back office functions, such as risk management and securities lending, have become more integrated with front office trading operations due to increased transparency in financial markets.
The trading floors are traditionally reserved for front office activities. This is where financial professionals come together to create markets in global economies by executing trades on behalf of investors. There is also responsibility that must be assigned to the business activity that takes place in the main office, and many of these tasks, from clearing and settling trades to accounting procedures, take place in a company’s administrative office. The convergence of some of these separate activities has made back office negotiation a reality as well.
The back office does not host the most intensive aspects of trading. Professionals who transact business on behalf of investors and who interact with clients are prominent in a commercial firm’s office. This area is considered to be the center where most of the profits of a commercial enterprise are generated. This is where trades are carried out from the research and analysis stage to the execution of a buy or sell order.
Back office business activities are also carried out in financial companies. Back office professionals usually respond to actions taken by traders in the front office. This is where risk management procedures are applied and accounting practices are enforced. Trades executed in the front office must be cleared and settled in the back office, and the value of trades and profits generated need to be confirmed. It is possible that certain back office trading functions are outsourced to third party companies.
Securities lending was created as a function of the back office. This is where agreements are made between two parties, including a creditor and a debtor. In securities lending, the shares of a financial security are extended to a trader so that the trading professional can bet on the decline of that security or the decline of that investment. The borrower offers some kind of security for the shares.
A shift in financial markets towards greater disclosure and more transparency has moved securities lending from a back office to a front office function. Not only has the approval process and facilitation of securities lending procedures been moved to the front line of trading operations at financial institutions, but investment professionals have also been relocated to be part of the front office trading operations. In essence, traditional back office trading is accepted as a front office activity.
Asset Smart.
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