Back office

As a settlement or back office is called the departments in banks and in the financial management of industrial enterprises which are engaged in the documentation and the implementation of completed through trading financial transactions.

A key task is to control the commercial transactions concluded by through timely coordination with the settlement of the counterparty ( counterparty ). This typically happens on the exchange of confirmations.

Office personnel cause all payments and deliveries, which are related to the shops.

For credit institutions which clear functional and organizational separation of the settlement of trade binding by the Minimum Requirements for Risk Management ( MaRisk ) of the Federal Financial Supervisory Authority ( BaFin) is prescribed. For industrial companies, it is " best practice".

• 2.1 Confirmation, control and execution - key tasks of settlement 2.1.1 control and coordination tasks
• 2.1.2 confirmation process, contract drafting and documentation
• 2.1.3 Initiation of payment and delivery

• 4.1 Personnel are equiped

Development

Transaction units of credit institutions

For credit institutions, at least the separation of business processes between trading and settlement is guaranteed for a long time. Today, the structural and organizational separation of trading and back office up to and including board level is one of the so-called "minimum requirements" that are placed on banks by the German banking supervision. Even within the respective functional areas must be ensured that in the processing of business transactions incompatible activities are performed by different people.

Minimum requirements are an instrument of banking supervision, with the proper organization of the business is to be ensured in some areas of credit institutions. These were last published in the announcement of the Minimum Requirements for Risk Management ( MaRisk) by BaFin on 20 December 2005. The request to the settlement process are largely published in 1995 minimum requirements for the operation of commercial transactions (MaH ). These reflect, among others, the lessons of the collapse of Barings Bank in February 1995. Here had, among other things, the lack of separation between the areas of trading, processing and monitoring enables the activities of Barings trader Nick Leeson, who ultimately had to ruin the bank result.

For large banks, the settlement areas normally divided into several specialized departments, since the processing of different product types (for example, exchange-traded products, OTC derivatives, foreign exchange) makes their own processes required.

Office personnel at industrial enterprises

For companies that do not belong to financial institutions, it has long been common for departments who completed money market transactions, and the related payments conducted. Today's standard procedural and organizational subdivision in trading and settlement has been established only since the 1980s. Meanwhile, it is usually supplemented in large companies through a financial risk control, which monitors compliance with the risk policy of the company. This development has two reasons: Firstly, companies have started since the 1980s increasingly use complex financial instruments such as interest rate swaps and currency options as part of their risk management. The increased number of completed transactions made ​​the creation of appropriate organizational units useful and necessary. However, in many companies, there were cases of fraud that made the recently emerged need for action. Beginning of 1986 was a case of fraud at Volkswagen AG announced cheated their employer in which working for the enterprise securities dealers and this fraud was facilitated by a non- clear-cut division of responsibilities in financial management. This fraud has led the world to the fact that companies in their operational risks were aware of, and first names as a countermeasure reorganization.

According to current understanding, it is one of the general duties of care of management to ensure sufficient separation between trading and settlement by an appropriate organizational structure. Both internal audit and auditors focus on the full implementation of this separation. Which entered into force on 1 May 1998 Law on Control and Transparency in Business (KonTraG ), this separation is not committed because the legislature was guided by the principle in adopting that further regulation of company law should be largely avoided. The legislature left it to the self-organization of the company to respond to the very general requirements of KonTraG. This law requires: "The board shall take appropriate measures, in particular to establish a monitoring system to ensure the survival of the company threatening developments are detected early " (§ 91 para 2 AktG). In fact, after the adoption of the KonTraG published a series of publications that had the structure and processes of organizations financial management of non-financial institutions on the topic. Among the most important publications include the theses to the minimum standards of the Association of German Treasurer were developed eV by the working group " KonTraG " - they have been published, among others, in the book edited by Bernd Saitz and Frank Brown book The Control and Transparency Act. As a minimum requirement was set there that trade, processing and recording must be made by the other people. The separation of financial management in the three separate organizational trading, settlement and risk management has been referred to in this publication as desirable. At the same time, the working group, however, also pointed out that such a separation on the basis of the typical magnitude and the lack of staff resources of finance departments at many companies would not be feasible. The separation is now regarded as "best practice" and is implemented in large companies.

The tasks

MaRisk define in Section 2.2.2 BTO the tasks of processing in a credit institution. Essential parts of this task definition also apply to companies.

Confirmation, control and execution - key tasks of settlement

In a bank, one can distinguish the following main tasks of the settlement:

• Confirmation process, contract drafting and documentation
• Control and coordination tasks
• Initiation of payment and delivery

Control and coordination tasks

The details of the trade to any of this have been closed shall, where practicable, be reviewed by the settlement. This can happen, for example, based on broker statements.

For the sake of separation of functions may trade and settlement to the respective inventory management ( ie information about the transactions entered into ) the other points not access ( independent of position or inventory management). This requires regular, commercially independent votes inventory management of trading and settlement, which are normally carried out by the settlement.

Confirmation process, contract drafting and documentation

Every business is always to be confirmed by the settlement compared to financial counterparties. In interbank transactions, it is common for most types of business that both sides are happy with the transaction ( the confirmation of the counterparty is called counter-confirmation ). The input of a counter-confirmation must be monitored, lack of counter-confirmations, reminders are issued. The confirmation process is to ensure that all completed transactions (and only these) are detected correctly in their own systems.

Ask the staff of the settlement, a deviation between its own business records and confirmation of the counterparty fixed, they have to react immediately. This is done with simple errors often first by contacting the dealer who has completed the business, or the settlement of the counterparty. For larger deviations or suspected fraud, however, informing the appropriate management level is necessary.

The scope of the verification depends on the completed financial. By archiving the confirmations is simultaneously also the documentation of completed transactions.

A special case represent transactions that have an automated settlement system ( " matching system " ) will be charged. These include, for example, through the settlement systems of Deutsche Börse train to train settled securities transactions. The processing units of the counterparty provide the necessary information for payment and delivery of the business ( " Settlement Instruction ") in the matching system. This same function as a confirmation. The monitoring of the settlement procedure by the operations department serves the same purpose as an inspection of the entry of a counter confirmation.

Initiation of payment and delivery

One of the key tasks of a settlement it belongs also to fulfill the commitments made with the completed financial transaction payment and delivery obligations. These include the payment of premiums from the conclusion of options, the performance of the interest payments on interest rate transactions or delivery of securities sold. Closely linked is the deadline monitoring of transactions.

Advanced task area

The implementation of the retail payments required to settle the obligations of the Accounts Payable does not belong to the traditional core competencies of the back office. In many companies, however, the settlement also responsible for forwarding the processed in accounting payment files to banks, negotiates the terms of payment transactions and checks their compliance. These tasks, however, are as likely to also settled in cash management of an enterprise.

The test of whether the trade only approved transactions were executed and whether granted counterparty and dealer limits were adhered to is, the settlement also occasionally associated. But the risk controlling is also often responsible.

MaRisk have also defined the control of the market conformity of transactions as a task of processing. In Banks, the task is carried out either by settlement or by Risk Controlling. Regardless of the assignment, however, the implementation of this requirement prepared in the past, partly problems. For highly standardized and highly liquid transactions such as foreign exchange spot transactions or short dated currency swaps of major currencies, the reaction is very possible by the market prices are determined at the time of conclusion about market data systems such as Reuters or Bloomberg. Market liquidity The less a financial instrument is, the more difficult is the determination of a timely comparison price. Therefore, the MaRisk tiered procedure for market justice control see the type and risk level before.

At the advanced functions of a settlement, it also includes editing data from financial transactions for accounting and the balance sheet of an entity.

The processes

A well-functioning settlement works on the basis of established and carefully organized processes. This is necessary because employees sometimes only a very short window of time available to perform certain tasks. If the trade, for example, by 12 clock completed a U.S. dollar overnight, with which it invests available cash in USD in the money market, the back office up to 14 clock time to process belonging to this business payments. The work process must ensure that the completion of this transaction is immediately noticed in the handling and execution - in this case, the transfer of the monetary amount to the bank accounts of the party to the contract, usually a large commercial bank - on time and in compliance with safety precautions, such as the four- -eyes principle, is performed. If such payment is not made on time, a one-day delay in the usual for large companies and banks transaction sizes may already have penalty interest result, significantly more than the equivalent of a small car.

In large companies, such as the DAX-listed companies, the processes between trading and settlement are largely automated and supported by a so-called treasury system. The input of a financial transaction then performs the system side to an automatic notification of the back office that another transaction was executed. In large banks, the process is similar, but here you normally speak at the position leading IT systems of the trading and settlement of front-office and back-office systems. These either use the same data to (integrated Front-/Back ) or are connected via automated computer interfaces. Only at smaller banks and a low trading activity takes place the transfer of businesses from trading in the settlement still on the paper.

The particular configuration of the confirmation process depends on the type of business. For highly standardized transactions such as money market or foreign exchange spot transactions confirmation usually takes place on the final day. This often electronic media such as SWIFT are used. This also allows an automated comparison of confirmation and counter-confirmation. Largely standardized transactions such as interest rate swaps are often confirmed by fax, the confirmation process takes a few days. The more complex OTC derivatives transactions are structured, the more extensive are the trade confirmations and the longer the confirmation process. It has become customary that only a party full confirmation - which then has expanded the scope of a contract - making out. The office personnel of both Parties shall exchange then promptly made ​​after year-end short confirmations.

The back-office systems have especially in extensive commercial activity in turn interfaces to downstream processes. In particular, here is the generation of payment instructions for payment transactions and accounting records for the accounting system call.

The staffing

Minimum staffing

A variety of processes in the back office assumes the four-eye principle. For example, payment data is entered by a person or authorized for the first time in a largely automated process and approved by a second person. Six -eye processes are the exception.

The minimum size for the staffing of a settlement is therefore considered a number of employees from four persons if the defense for all processes provides for a maximum four-eye control. With this line- size each employee can go on vacation. If one more person from illness, the processes can continue to be conducted properly. To ensure the smooth operation in a further case of illness, appropriate passwords and optionally deposited work instructions that are kept in sealed envelopes in a vault or to any other place largely secured for emergency for another group of people.

These requirements on the staffing make clear why it is difficult for SMEs in particular, implement the necessary for the proper conduct of financial management separation between trading and settlement. Medium-sized companies make do usually, by locating the tasks in departments whose core activities are in another area. For example, the overnight and term money market are perceived by employees of controlling as a secondary task, while the functions of the back office accounts receivable are assigned.

The problems

Exists between the employees of a settlement department and those of a commercial department in most companies and banks a marked difference in pay. In addition, trade employees often have a greater proximity to markets and products. Despite the personnel separation between trading and settlement close cooperation between the two departments is necessary, ie the employees of the settlement and commerce are working day together in close cooperation. Employees of the back office must respond in conspicuous transaction and, where appropriate, take measures escalation. The first measure is usually a check of processing employee with the dealer because abnormalities are often based on incorrect entries and so simple work errors. If it is not simple to input errors, there is a danger that the more market- colleagues of the front offices convince their colleagues about it, to ignore the deviation as a typical business. This risk increases when a trader trades with complex products.

Processing Support process or core process

The tasks that perceives a development company page count on from a business perspective to the support processes that need to be perceived but who is not part of the core functions of a company, as they are not a direct customer benefit or gain a competitive advantage. For financial institutions, the allocation of the tasks of the back office to the core processes is obvious since a well-functioning back office can both contribute to customer satisfaction and provide a competitive advantage. Customers would be here both other financial institutions as well as companies entering into financial transactions with the financial institution. Often poorly executed confirmations or delay in performance of payment obligations can lead to counterparty emphasize that financial institution from the list of counterparties with which they would enter into such transactions.

As a support process the tasks of the back office at company are occasionally checked to see whether they represent an outsourcing potential. Until now, however, no company is known, has implemented this. Basic expect both sensitive data be the ones which bypasses a back office - completed financial transactions can infer the financial risk profile of a company - as well as the close temporal sequence of processes between front office and back office that makes outsourcing a part of the processes difficult.

For financial institutions, however, some steps have been taken in recent years to merge processing functionalities. Some large international banks have focused processing tasks on each one location in Europe (mostly London or Dublin), North America and Asia (mostly Singapore). One, based in Frankfurt am Main Commercial department of a financial institution who enters such as financial instruments to hedge the exchange rate risk with the German company would then work with a London or Dublin seated operations department, for example, also supervised a London-based trade department in addition to the commercial department in Frankfurt.