Clearing and settling trades in the busy world of the back office

If you delve into the murky world of investment banking, you will soon hear the terms ‘front office’, ‘middle office’ and ‘back office’.

When people talk about the front office, they’re talking about the sexy areas of investment banking – mergers and acquisitions or sales and trading.

When people talk about the middle office, they are referring to functions such as IT, accounting (finance) and risk management (which we deal with in other pages of this book). When they talk about the back office, they’re talking about operations.

Unlike the people in the front office, people working in operations do not liaise with clients to generate revenues and profits for the bank.

Instead, the division is a support function – operations professionals support people in the front office to make sure everything works smoothly and the bank gets paid.

The main business of operations is clearing and settling trades. Clearing trades involves making sure that the records one bank has kept of the sale of a financial security match those of the bank or organisation it sold the security to.

In most cases, simple trades are cleared automatically through huge electronic systems such as Brussels-based Euroclear.

‘Settlements’ covers everything from preparing the documentation required for a sale, to making sure the bank has been paid for all the shares it has bought and sold.

Settlements professionals ensure that stocks or shares bought and sold by the bank’s traders are exchanged for the correct amount of money.

In recent years, a number of operations functions have moved away from major financial centres. In Europe, Scotland, Belfast and Poland (as well as nearshore centres in English cities like Birmingham and Bournemouth) are popular destinations.

In Asia, Singapore has been a popular hub for operations for some time, but cost controls have prompted some banks to move these functions out to Malaysia.

Meanwhile, in the US operations functions are rarely based on Wall Street, or even New York state. Instead, nearshoring is the new trend, and these functions are increasingly shipped out to Salt Lake City, North Carolina and Jacksonville, Florida where workers and office space are decidedly cheaper.

Roles and career paths

As a junior working in clearing and settlements, your job will mainly involve intervening when computer systems fail.

Every now and then, automatic clearing systems break down in a so-called ‘exception’. Clearing specialists spend most of their time dealing with these exceptions, trying to work out what went wrong.

If you work as an exception manager on a settlement desk, you might talk to traders who claim to have sold shares for $3 each when the buyer says the price was only $2, for example. However, there are some areas of the market where clearing is not automated and if you work in one of these, you will be expected to do a lot more than simply sort out failures in the electronic clearing and settlements process.

In particular, the huge $600 trillion over-the-counter (OTC) derivatives market still relies heavily on a lot of manual processing, which is creating problems. Moves are being made to automate and centralise the clearing and settlements process in the OTC derivatives market. The rationale behind this regulatory-driven move is that it will increase transparency in the market and reduce risk. This is creating big challenges for banks’ operations teams, from both an IT and a human resources standpoint.

Closer to the trading floor is the role of the trade support officer, which can cover a range of different asset classes, from equities and bonds to commodities or derivatives. Here, you are in the firing line for any queries a trader might have – everything from reconciliation issues to any discrepancies between the various counterparties involved in the trades.

As you work your way up the operations hierarchy you will progress to more strategic roles, looking at issues such as how to streamline the exceptions process or which functions should be moved offshore.

Pay and bonuses

In operations, the general rule is that the more exotic or specialised the product you’re working on, the higher the pay.

In the UK, for instance, a manager working on equity or fixed-income settlements receives £55k-70k ($88k-113k), according to recruiters Robert

Walters, a figure that rises to £65k-85k ($105k-137k) for the same role focusing on equity or credit derivatives.

Starting salaries are generally around $50k-60k, but bonuses are small compared to the front office, at 5-15% of base pay.

In Singapore, a manager working on equity or fixed income settlements earns $50k-95k, rising to $80k-120k for derivative products. US-based settlements professionals can expect $65k-150k at associate to VP levels.

Skills sought

When banks are filling operations roles, they look for a combination of problem-solving, interpersonal and time-management skills.

In a role where accuracy and consistency are absolutely key, attention to detail is also a must.

“Be prepared to demonstrate an extraordinary level of focus and attention to detail while working under pressure,” says Aldis Sung, analyst in the operations division at J.P. Morgan in Hong Kong. “Take a holistic approach to your daily responsibilities and understand how your actions impact other systems and processes downstream, and the organisation as a whole.”

While operations professionals have few client-facing responsibilities, they are essentially ensuring the smooth running of the organisation and therefore any problems they solve help enhance the ‘client experience’.

Good communications skills are therefore important, because people in operations deal with many other divisions and functions within the bank.

Would you be comfortable, for example, dealing with an impatient trader?

“Communication skills are critical. Hone your communication skills by taking advantage of classes that help you feel comfortable speaking in front of individuals and groups. This will assist you in clearly articulating your thoughts and actively participating in conversations,” says Monty Forrest, managing director, prime services operations at Barclays. “Be vigilant to potential problems and be proactive in identifying solutions to resolve them. Client servicing is both internal and external, and it is the bread and butter of your job,” says Sung. “Be patient in understanding what your clients need and be creative in solving their problems.”