Back to Front in Cleared Derivatives

Imagine a world where the connections between the front office, middle office, and back office all click together seamlessly and normalized information flows in both directions. Straight through processing and front-to-back workflows are well established today, but what about back-to-front workflows?

When a trade was executed in the past, it left the front office in the form of a paper ticket, went to a person in the middle office who would manually key in the allocations for the execution, and then it went into the back office sea of executions. At that point, it was often never heard about again and assumed to be cleared.

Cleared and forgotten was the ideal scenario, but that wasn’t always the case. Often, days went by and the trade was long forgotten. It wasn’t uncommon for the middle office to call up to say the trade had not cleared or the client to call up to say their clearing broker had not received the trade. This was a problem.

Finding out where the trade was wasn’t always straightforward. It usually involved spending time no one really had, tracing and uncovering the reason for the trade break somewhere in the chain, and often led to unfavourable end results in the form of an error or even worse, a costly one.

The good news is that this disjointed workflow has evolved. Not everywhere, but it has evolved for the better in many places.  For one, the front office is now equipped with the tools to be able to split and allocate themselves, so the trade doesn’t have to be re-keyed by another person, reducing risk.  Secondly, many clients have evolved enough to be able to send their allocations electronically over FIX and if the sell-side system can handle it, the allocation process is handled electronically with no manual interaction, reducing risk even further.

But what also becomes a key component in the workflow is having the confirmation from the middle and back office represented in the front-end system.  For example, a field in the order blotter showing a Cleared/Uncleared status allows the trader to immediately see if the trade has cleared or not. If it hasn’t, they still potentially have an issue, but that knowledge allows them to act proactively in a timely manner.

The clearing status in the front-end is a game changer. It allows you to have a complete understanding of the lifecycle of a trade, back-to-front, and therefore reduces risk for both buy-side and sell-side. It can even strengthen that relationship.

But this is just the tip of the iceberg to what could potentially be pushed from back-to-front. It will become standard practice and clients will demand it as part of the overall level of service. Watch this space.