Tony Freeman uses a motoring metaphor to explain the complex relationships between back, middle and front-office IT solutions in a period of major global change.
“There is a big dichotomy, where the investment is upfront and not at the back,” says Freeman, who is visiting Australia in his role as global head of industry relations at UK-based middle-office solutions provider, Omgeo.
“You’ve spent all your money trying to drive faster – and investing in the front office – but you haven’t installed any brakes in the car. There’s been a front-office arms race going on for many years to speed up execution velocity, but very often these same firms have spent very little on their middle office or back office, so their capacity to trade far outweighs their ability to trade, and trades aren’t any good until you’ve properly processed them.”
Omgeo’s business is in automating trading events, connecting brokers, dealers, banks and parties on the sell side with their clients, largely institutional investors. The company is a joint venture between Thomson Reuters and the Depositry Trust and Clearing Corporation (DTCC).
Regulation in the year of big data
In the Year of Big Data, as many people are calling 2013, the middle office is a crucial piece, although perhaps overlooked.
It’s a transformation strongly driven by regulators in Europe and the US in particular as the world contemplates a transition to T(trade) plus 2 (days) settlement and the global Legal Entity Identifier (LEI) project, which assigns identifiers to market participants to improve transparency and limit counterparty risk.
“There are a whole lot of issues that have been known about for years, and talked about endlessly and debated but nothing really changed,” says Freeman.
“So the viewpoint of the EC and the EU is that the markets are never going to do this on a voluntary basis: you have to regulate and give people incentive.
“Regulation works because it can make everyone make an incremental change at the same time, and if we all do that at the same time then it is a big step forward, and that’s what they call the alignment benefits of regulation.”
Mission of positional harmony
Freeman’s mission is to spread the work that the back, middle and front office need to talk to each other in harmony, because if they don’t, it increases operational risk.
The mantra across the world is standardisation and automation of execution to a new paradigm of transparency, where counterparty risk is entirely transparent and “the regulators can see what is going on much more easily than they can when people do everything in the dark”.
Freeman is a frequent visitor to Australia, and that while it is “renowned” for the effectiveness of it regulatory regime, a major feature of the market is that many local firms do not have a global presence.
“If you are a big global manager – and the best ones use the same system across the world – these are harmonised processes operating globally 24 hours a day,” he says.
“Then there are other clients who have a global operations centre in somewhere like Singapore, so the time difference is no issue for them.
“Then there is the third group, and these are the ones who will face difficulty, and these are purely Australian firms working 8 am to 6 pm Australian time, so when time comes to settle a fixed income transaction in London, they are all tucked up in bed.”
These firms, says Freeman, will need to find a new operating model in the future.
“These firms will have to think hard about global processing because they are already a day ahead of the rest of the market,” he says. “What they’ll have to do is come to rely more on their custodian partners who are genuinely global organisations.”