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For some, the term middle and back office can be a source of confusion. To give an overview of this operational facility, HFM Week spoke to the experts in the field to find out what is really meant by middle and back office services, and what the future holds for a service with increasing technological capabilities.
HFM: How would you define middle and back office services? Andrew Dougherty (AD): By middle and back office services we mean: a) Middle office services: For BNP Paribas, the scope of middle office services has evolved from the core operational processes occurring post-trade, through settlement, and including on-going portfolio support. b) Core middle office services: Beyond the classic trade capture, affirmation and reconciliation, the service scope today includes P&L calculations, collateral/margin management and prognostic cash reporting. Managers appreciate providers who anticipate their needs, invest in the best technology, and make innovation a priority. c) Value-added middle office services: Our peers often refer to OTC processing, risk monitoring or analytics and cash management as value added, but we specialise in crafting services unique to our clients needs. Paula Anderton (PA): Middle and back office services include all the operational requirements of a fund following the execution of a trade. The middle and back office takes over the minute a trader has executed a trade, and manages the transactions whole life cycle. Operations carried out by the middle and back office include: Ensuring that the transaction is correctly captured in all appropriate systems. Reconciliation of the transaction details with the counterparty to the trade. On a daily basis, dissemination and reconciliation of the transaction details with any third-party service providers that need to become aware of the trade for example prime brokers, fund administrators, independent valuation providers, clearing houses and matching service providers like the Depository Trust & Clearing Corporation (DTCC). On a daily basis, sourcing from various data vendors any data related to the processing of the transaction for example, market data used for valuations, corporate actions, LIBOR or other fixings in instruments with floating legs, holiday calendars and ensuring they are correctly captured in all appropriate systems. Creating all types of reports internally for the fund manager, for example, reports on gross and net positions, P&L, P&L attribution, risk, option exercise schedule, cashflow, NAV and various investor reports. Settlement of all cashflows related to the transaction. On a daily basis, management of collateral moves with the counterparty to the trade (agreeing the collateral amount and executing the transfer). Managing all aspects of post-trade events for example: amendments, terminations, credit events, option exercises. Pauline Modjeski (PM): Horizon Cash Management is an asset management company with a focused business model. As were dedicated to a specific discipline providing short-term cash management for managed futures funds, hedge funds, funds of funds and other institutional investors the middle office services we provide centre on investment management, daily reconciliation, accounting, customised reporting, liquidity management and risk management. Each of these responsibilities is core to our clients. And all are truly value-added, because when placing cash one of the most important assets under the direct supervision of professionals whose sole responsibility is the active management of cash, fund managers are freed up from the investment and administrative responsibilities that this task requires and can direct their energies toward asset gathering, strategic investment and the other primary duties of fund management. HFM: What are the factors driving demand for outsourcing middle and back office services, and what are the anticipated challenges? PM: The four most important factors that drive the decision to outsource are: time, resources, expertise and money. Time: To those unfamiliar with managing cash balances, the process may seem simple. Active cash management, however, is not a
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Andrew Dougherty is the COO for Global Fund Services, BNP Paribas North America. He is responsible for managing the groups US hedge fund administration and middle office outsourcing businesses.

Paula Anderton joined Point Nine in July 2007 to help organise and oversee the companys middle and back office services. Paula previously spent over six years at Goldman Sachs.

Pauline Modjeski is president and executive managing partner of Horizon Cash Management LLC. Pauline serves as Horizons chief operating officer, with each of the firms department heads reporting to her.
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one-time decision. It requires constant attention and vigilance to construct the portfolio, monitor its performance, handle daily inflows/outflows and keep all parties fund manager, broker-dealer, clearing firm, custodial bank advised as to the money movements. Resources: To ensure the middle office function works quickly and seamlessly, proven reliable operational controls process and technology are essential. Horizon has built and maintains a proprietary accounting system that facilitates the orderly and accurate implementation of allocations, trades and money movements. Expertise: Weve observed a growing trend among fund managers to seek outside best-in-class providers for certain tasks. Not surprisingly, those best positioned to capture new business are those who offer special skill-sets and have a history of accomplishment. Cost: Optimising capital efficiency that is, making ones assets work as hard as they can propels many fund managers to consider outsourcing. Smart managers nearly always employ a cost-benefit analysis when seriously evaluating whether to outsource the active management of their cash. AD: We see the need for specialisation, cost reduction and risk mitigation driving our clients decisions to outsource. Managers who had dealt purely in listed products are now seeking alpha within the OTC markets, and are therefore adding complexity to the portfolio. At a certain scale, many sophisticated managers choose to realign their internal resources towards higher ROI activities instead of allocating capital towards technology infrastructure and expensive staff building. A properly crafted outsourcing solution can result in significant cost reductions. Top-notch service providers leverage their operational scale, particularly within OTC processing, allowing managers to avoid the manual processing, and mitigate the operational risk, often found at smaller administrators. With numerous control failures garnering significant media attention, institutional investors have placed more importance on managers understanding of risks; both their magnitude and probabilities. Some investors have made outsourced operations a prerequisite. Our long local history in servicing OTCs, and the groups award-winning expertise in equity and credit derivatives, gives comfort to our clients. Consistent and clearly defined portfolio valuation remains a priority. Decreases in liquidity and reduced price discovery sources make the middle office service delivery more arduous. The increased use of complex OTCs tests providers skill to attract, train and retain talent. In addition, tightly controlled processes and flexible systems support the managers need for accurate and timely valuations. We focus on understanding the managers portfolio from beginning to end, seeking to deliver value throughout the investment life cycle. PA: To keep up in this competitive market, fund managers constantly expand the volume of trading and the range and complexity of products that they trade in. In most cases this requires an enhancement of the existing middle and back office operations and associated infrastructure. This means investment in both time and money; experienced middle and back office professionals need to be hired, office space may need to be expanded, and an upgrade or complete overhaul of the funds systems and IT infrastructure may be required. Outsourcing of the middle and back office operations to support higher trading volumes or entirely new products helps fund managers reduce their time-to-trade, while simultaneously increasing their operating efficiencies and cost savings. In cases where new funds are being set up, fund managers completely avoid the investment of time and money required to set up an internal middle and back office, and, instead, choose to outsource all their operational requirements. The operational requirements of a traded product is exactly the same, irrespective of the fund manager that is trading it. This repetitive nature of operations makes it an ideal outsourcing candidate. Operations can be centralised around skilled, experienced professionals and specialised systems built by experts. This can result in a better service than can be provided by an internal team, and, therefore, in lower operational risk. HFM: Has there been a significant shift in the expectations for sourcing middle and back office services over the last year? If yes, then how, and do you expect it to change in the future? PA: Over the last year, there has certainly been an increase in demand for outsourcing of middle and back office operations. Increased marketing and awareness among fund managers of the outsourcing industrys service offering has helped,

Weve observed a growing trend among managers to seek best-inclass providers for certain tasks
but the most important contributions to this shift are the increasing competition among fund managers and the recent global financial crisis. In a drive to maximise investor return, fund managers are trying to increase revenues by expanding the volumes of trading and the range and complexity of products that they trade in, while requiring an almost non-existent time-to-trade in order to capitalise when investment opportunities present themselves. At the same time, they are looking to reduce their costs. This is driving fund managers to consider outsourcing part, or all, of their middle and back office operations to
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transparency if their operational teams are not ready for it. PM: Were essentially at the one-year anniversary of the credit crunch and shockwaves continue to rumble through the alternative investment industry. This upheaval has served to remind fund managers how critically important it is to have middle office support thats comprehensive, accurate and timely. Were seeing clients and prospects intensify their efforts to look under the hood and fully understand how each element of the process works. Were delighted with this increased scrutiny; its not only one of our strengths, but its a sound business practice. HFM: Speed and efficiency is integral how does the service offer ensure this? What is your USP? PM: For many fund managers, the daily management of cash balances to best effect is a near-invisible, yet essential, part of the business operation. We deliver on both speed and efficiency fronts in a variety of ways: on a daily basis, client portfolios (each a customised solution) are reviewed, every transaction is reconciled, and statements are issued to each client. Our proprietary technology is a key component of these deliverables. But our people, including portfolio management, in-house portfolio strategist, accounting team, compliance team and technology, are our key point-of-difference. We pride ourselves on our service; exceeding expectations in every interaction, whether with clients, banks, broker/dealers or administrators. AD: Delivering accuracy within a controlled environment is paramount to our clients. Quick, inaccurate, and inflexible data does not deliver value. At the start of the transition process, our team works with the managers team, looking for inefficiencies and risk gaps; then crafting solutions to deliver value. Clients cite our end-to-end attention to customer service, adaptive technologies, and our unique approach to a controlled-processing environment as our key differentiators. Our clients success demands everincreasing levels of STP and enhanced portfolio reporting. No-one questions that manual processes are linked to the aptitude of the operator, so we seek to automate, not populate. We collaborate with our client managers and their prime brokers and can adapt to their trading systems and pricing sources. Some of our competitors force managers to adapt to their infrastructure. Our philosophy allows managers to focus on asset management; not worrying about data integrity or its integration. Our mission is to deliver these innovative and adaptive solutions for the worlds sophisticated managers, in markets where they do business. HFM: Can you explain why automation and information technology is so important to the middle office set-up? PA: There is no doubt in our minds that the key to a fast, reliable and professional service is automation. It is up to each middle and back office service provider to choose an automated, information technology solution that is appropriate to its specific service. It is important to be in complete control of any technological solution. Relying on third-party vendors for upgrades and support may become a bottleneck that negatively impacts the speed and quality of service we give our own clients. We have spent a significant amount of time and investment building our own operational, state-of-theart, flexible and expandable, web-based operations platform. We also rely on our technology and our experienced, professional, energetic and personable staff to provide a unique service to our clients. PM: Technology plays a critical role in Horizons middle office deliverables to clients. Were exceptionally proud of our proprietary system that, for years, has enabled us to provide same-day statements to our clients, presenting a comprehensive listing of all holdings. Theres quite a bit of talk these days about complete transparency. With many funds, investors have to wait until the end of the quarter to learn the funds holdings. Our clients have benefited from daily transparency for years, and our proprietary system enables us to develop customised reports, created and securely transmitted to our clients in the format of their choosing. AD: Managers and providers benefit from increased levels of automation when processing OTC derivatives. Automated services such as DTCCs Deriv/Serv might eventually replace some manually intensive, long-form ISDAs. In addition, the innovative use of current technologies can deliver value. As the industry matures, some common functions within the post-trade environment will continue to industrialise and deliver improved efficiencies for the managers. n
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service providers that can support a wide range of trading products. This outsourcing service should meet with high expectations and be at least the equivalent of the operation built internally had investment in time and money not been a consideration. Point Nine has seen a significant increase of interest in this field. This year we had a faster client uptake and more inquiries into our service proposition by prospective clients than ever before. We have also seen more interest by private equity and venture capital firms looking to invest in this field. We expect that outsourcing of middle and back office services will continue growing exponentially over the next few years. AD: Managers have begun to use multiple prime brokers in order to expand their instrument mix and attempt to diversify their counterparty exposure. Our platform, centred on efficient data aggregation, anticipates this complexity and can deliver most daily requirements including margin analysis, cash forecasting and collateral management. Managers seek a comprehensive view of their portfolio activity, and the shift to multiple prime brokers can remove this critical level of
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