Cash Management: Back Office Processing

Back office roles vary according to treasury size, complexity, organisation and policy. However, the basic processes and disciplines follow similar fundamental patterns throughout corporate treasury; and all back offices can benefit through improved process quality and efficiency by deploying an appropriate TMS solution. The largest treasury organisations may segregate between front, middle and back offices; in this analysis the usual middle and back office disciplines are treated together, as in most treasuries. Among other tasks, front office is assumed to be responsible for risk management, deal initiation and market execution.

STP and Workflow Management

Today’s TMSs allow treasuries to define and operate straight-through processes (STPs), which are effectively automated and secured workflows. In this environment the back office may be regarded as part of a production line, responsible for seeing each process through to completion. It contributes information, validation and authorisation operations as necessary; researching and correcting any errors and omissions detected by the TMS.

TMSs allow workflows to be defined flexibly, so they accurately reflect the organisation’s treasury policy and processing details. This flexibility enables management to define segregation of duties and transaction authorisation: for example, payments under US$ 5m might require just one back office person’s authorisation, with larger payments needing two.

The TMS ensures that policy is accurately applied. Defined workflows are locked down using the system’s security functionality, so that they virtually cannot be practically subverted or deflected. This takes advantage of the rigid nature of operations management computer programmes – they reliably follow their instruction set in the same sequence, following the same logic, and with the same predictable results. This illustrates the importance of thorough testing when implementing or upgrading a TMS. Properly implemented, a TMS provides a robust, dependable platform for policy compliant treasury operations management.

A key back office technology-based benefit is derived from TMS automated task scheduling and monitoring functions. In practice, the application of task scheduling means that many back office processes such as bank balance and transaction statement uploads and report generation will take place automatically; eliminating the risk that they will be neglected or forgotten.

Further, the system can prompt the back office to perform tasks such as error repairs, payment validation and authorisation and interest rate resets. The system will remind the appropriate person until the critical task is completed, significantly cutting the risk that the task will be forgotten or incorrectly performed.

The practical effect is that back office operations are systematically controlled and secured, in ways that cannot be achieved through spreadsheet or manual operations. The structure and discipline of the TMS can deliver fully dependable operations, freeing individuals to focus on decision taking and essential actions, rather than being deflected by data processing concerns.

Control and Transparency

TMSs are based on a single central database, which is automatically updated in real time when new information is entered or imported. This means that back office has immediate access to fully up-to-date information as the basis for the team’s decisions and actions, including reporting. The quality of the rates used for mark-to-market (MTM) revaluations can be validated and managed. This provides assurance on the quality of system control, the calculations performed and reports generated. It is also important for the quality of research and resolving any questions or problems.

Effective treasury technology supports the back office’s key function of providing management with accurate and relevant information.

Confirmation Management

Separating confirmation management functions from dealing has long been accepted as finance industry best practice. Many well-known rogue trader dealing scandals, such as the collapse of Barings in 1995 would have been detected at an early stage or even prevented through effective and independent deal confirmation management implementation. In paper-based confirmation environments, TMSs can do an excellent job in managing flexible confirmation templates for all deal types and counterparties, thereby minimising errors and liberating staff.

It is increasingly common for confirmations to be fully managed electronically through specialist third party services, providing a higher level of accuracy and control. The TMS is responsible for creating the electronic conformations using templates, and exporting the information promptly to the service organisation. The complementary confirmation will have been similarly exported to the service by the deal counterparty, and the service then compares the two records.

The service returns a code to both counterparties; either indicating that a match has been validated or that differences have been detected. The TMS will alert back office, so any mismatches can be researched and corrected before settlement is attempted. Many treasury STP workflows include an automated gate, which is opened only after a confirmation match has been achieved, initiating the settlement process.

The coordination between TMS and confirmation management service offers an effective means of segregating an important back office control function for the deal origination process, of reducing or eliminating errors from the deal management workflow, and of controlling a key step in automated deal processing.

Settlement Management

Deal settlement is arguably the most sensitive and vulnerable of treasury processes, given that many settlements involve moving high-value payments from the company’s bank accounts. TMS processes can control and secure the settlement mechanism, significantly reducing or eliminating financial and operational risk in this sensitive area. The key ways in which the TMS improves the process are through segregation of duties, secure workflow automation, and by the definition and controlled use of standard settlement instructions (SSIs). In this case, a practical treasury policy might require that transaction originators are never authorised to approve payments, so payment release must be activated by another distinct set of people.

SSIs are an important part of the system static data. Their research, data entry and validation form a significant implementation task. They provide the settlement instructions for each transaction type and dealing counterparty. A key step in making a system implementation or upgrade live is locking down the SSIs. Subsequently, the correct SSI is automatically attached to the transaction during the dealing workflow. The TMS’s scheduling function initiates the settlement process on the value date, and will create and export the payment after an approval step, if required by treasury policy.

This high level of automation provides a secure and efficient process, due to the segregation of duties, securing of the SSIs and lock-down of the STP payments workload that can – and should – be implemented. It follows that if an SSI has to be overridden for some reason, a special process and approval mechanism must be enforced by the workflow.

Technology provides a dependable means of managing a fully-secure treasury payments management function.

Compliance and Reporting

Modern treasury technology smoothes the way to back office compliance, with internal policy requirements and external regulation. Real time updating of the central TMS database is the underlying feature that ensures processes are operating and reports are constructed using up-to-date information, and with minimal human intervention or risk of error.

Treasury policy may be implemented and monitored relatively easily; for example in managing counterparty dealing limits. The TMS can check and alert if a limit breach is being approached, and can help to prevent the costs and risks if an actual breach occurs. It can prepare credit exposure management reports, and ensure that nominated people are informed of policy violations. Dealing might be a front office responsibility, but it is the back office’s task to verify compliance and report as necessary.

Similarly, the TMS provides essential support for the onerous task of complying with regulations such as Federal Bank Account Reporting (FBAR), the European Market Infrastructure Regulation (EMIR), Dodd-Frank and International Financial Reporting Standards (IFRS).

Technology has liberated the back office from many mechanical tasks, freeing the team for value-added functions such as process management, research, analysis and management reporting.

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