The Operations groups at investment banks brokerage houses, hedge funds, mutual funds or pension funds are commonly referred to as the “back office.” Unlike the traders, salespeople, bankers, fund managers and corporate financiers of the front office, operations people don’t work directly with customers to generate revenue and profit. Instead, they serve in support functions. Their jobs may be “behind the scenes,” but they’re critically important: An inefficient back office can negatively impact a firm’s profitability.
Operations professionals ensure a financial services firm functions smoothly and efficiently. Their functions cover everything from information technology to human resources, trade support, accounting and finance, and risk management. In fact, the overall Operations role is so broad, employees typically specialize in only one of these areas.
At the core of Operations is the function of clearing and settling trades. Clearing trades involves looking at the records made by traders or investment managers when they buy and sell financial products, then checking to make sure they match the records kept by the counterparties to those trades – the people from, or to, the securities were bought or sold.
Settling trades is about making sure the securities bought and sold are exchanged for the correct amount of money. Settlements cover everything from preparing the documentation required for a sale to making sure the bank has been paid for all of the shares it sold, or has paid for all the shares it bought.
Operations may not be where banks make their profits, but it’s certainly an area where they can lose them. The more efficient a financial services firm is at conducting its business, the greater the percentage of revenue that falls to the bottom line. Another area of Operations is hedge fund operations, or “prime brokerage.” Prime brokers are the back office for hedge funds, offering everything from clearing, settlement and custody facilities to help in managing relationships with investors and raising new funds. Prime brokers play a lucrative role in large investment banks.
Realizing just how important Operations can be to profitability, investment banks and other firms are seeking a higher caliber of employee to work there. These professionals support a firm’s trading operations by performing a multitude of functions, including reconciling a trading desk’s daily profit-and-loss statements or maintaining a firm’s internal portfolio accounting system.
At the same time, banks are shifting simple elements of the operations function to lower-cost locations like India, China or Russia. This move offshore has been paralleled by an increased use of technology. Twenty years ago, clearing and settlements were labor-intensive businesses involving a lot of forms and enormous filing systems. In the case of most securities today, the clearing processes are dominated by computerized settlements facilities that transfer financial products electronically. Settlement systems such as the Clearinghouse for Interbank Payment Systems (CHIPS), Fedwire, and the Depository Trust and Clearing Corporation (DTCC) hold securities in electronic format and transfer them from one owner to another without the cumbersome paperwork of the past.
None of this bodes particularly well for jobs in Operations, which is taking a hit as processes are electronically streamlined and business moves overseas. The good news, however, is that the jobs left behind tend to be more interesting and pay better salaries. Derivative products, such as credit swaps, are also more likely to involve paper-based contracts that have not, as yet, fully evolved into electronic clearing systems.
Roles and Career Paths
Roles in clearing and settlements are typically for exception managers, the people who deal with instances where data on electronic systems don’t match; they try to work out the reasons for the discrepancy. If you work as an exception manager, you might find yourself talking to traders who claim to have sold shares for $3 each when the buyer says the price was only $2. You might also find yourself chasing payment from recalcitrant overseas buyers for trades they deny ever took place, especially following periods where trading was particularly volatile and rapid.
Electronic systems have vastly increased the speed with which simple trades are processed. But derivative trades are often too complex to be settled electronically. Often, for example, trades are still confirmed by fax or through the review of actual contracts. The large number of documents required for derivatives transactions creates roles for documentation specialists. Some derivative operations positions require an accounting degree and a CPA designation, as well as experience in public accounting.
Most operations jobs have a strategic element. Banks use operations staff to analyze ways of making processes more efficient, and project managers implement their suggestions. Thus, a finance background and knowledge of how securities markets operate can be important to success in this field. The more senior you become, the more likely you will work in this kind of strategic or project management role.
Skills and Qualities
- Deal with conflicts firmly and efficiently
- Strong analytical and problem-solving skills
- Strong math skills
- Attention to detail
- Good organization and time-management skills