1. Back Office Structure and functions April 2006

2. 2 Table of Contents Back office structure and functions (Benoit Schaus) Sourcing (André Vandencamp) Outsourcing (François Dorland)

3. 3 Table of Contents Back office structure and functions  Overview of a financial institution landscape  Why a back office ?  A central department  Some back office issues to conclude

4. 4 Illustration : Purchase / Sale of security A complex operations series Middle Office External Bankers & Clients instructions Front Office Check completeness of instruction (cash availability) in the banking system Input instruction in the banking system Transmit instructions Checks client details: cash availability, signatures in the banking system Treasury  Validate the orders in the banking system Back Office Print the ticket from the banking system Generate the counterparty ‘s deal in the banking system File the instruction  Book the deal with the counterparty Input deal’s details in the banking system Complete the ticket and transmit it  Check client and bank deals in the banking system with ticket  Execute the deals in the banking system Generate, validate and send the swift messages File the ticket with swift messages and broker confirmation   Overview

5. 5 Illustration: a standard IT Architecture for a private bank in Luxembourg A complex technical environment Client information Instruction Electronic S Report Commercial action Credit proposal Know Your Customer Banking System  MM rates & security prices FX rates & security prices Reporting interne Bankers Alert DB_STAGING OLYFPRO Fund Order Management (FOM) Swift Alliance Recon Clearstream (Create & Connect) Semi- automatic Automatic In-house application phase 2 In-house application phase 1 External application shared with Bankers  Other  Overview

6. 6 How is a trade processed in an institution ? (1/2) Customer contacts investment advisor Inv.Advisor Enters instruction and sends to HQ Dealer Bulks and checks price quotes Dealer Strikes a deal and enters on ticket Middle office Enters the ticket + checks compliance 123 6 45  Overview Front Office Middle Office

7. 7 How a trade is processed in an institution (2/2) Settlements Pre-settlement matching Cash management Checks USD balances Forex Exchanges currencies Clearer Securities deliverd Reconciliation Reconcile cash, securities Investigations Investigate if problems occur Accounting Book in customer’s account Reporting Inform the customer 78910 14131211  Overview Back Office

8. 8 Table of Contents Back office structure and functions  Overview of a financial institution landscape  Why a back office ?  A central department  Some back office issues to conclude

9. 9 Why a Back Office ? A simplified model Front office Middle office Back office  Why a back office ?

10. 10 Front Office: the place where the deals are done Front office Middle office Back office Trade execution Heavy IT investments Bloomberg, Reuters, …  Why a back office ?

11. 11 Middle office: the go-between among FO & BO Front office Middle office Back office Compliance check Flash P/L for Front Office Management of complex deals (Entering tickets) FO Technical support (curves, rates)  Why a back office ?

12. 12 Back Office: the final stage Front office Middle office Back office Matching Settlements Reconciliations Reporting  Why a back office ?

13. 13 Table of Contents Back office structure and functions  Overview of a financial institution landscape  Why a back office ?  A central department  Some back office issues to conclude

14. 14 Back Office A central support Department in a financial institution Payments TreasuryTrade Securities Back office  A central department Settlements Reconciliations Investigations Cash management Foreign exchange Customer reporting Static Data Corporate actions

15. 15 List of back office functions Settlements Reconciliations Investigations Cash management Foreign exchange Customer reporting Static Data Payments Corporate actions Back office  A central department

16. 16 Settlements department  Assure that all trades that were executed in the front office are settled on time  Pre-settlement matching  Ensure correct settlement on settlement date  Usually organised by country e.g. international settlement and domestic settlement Failed settlements can cost the institution a lot of money Settlements Back office  A central department

17. 17 Cash management department  Check all the balances at correspondent banks  Ensure that money is available to finance trading and payments activity  Invest available funds overnight to ensure best return Cash Management Back office  A central department

18. 18 Foreign exchange department  Ensure correct settlement of the foreign exchange transactions  Handle the administrative part of the foreign exchange deal (e.g. sending SWIFT MT 300 confirmations) Foreign Exchange Back office  A central department

19. 19 Payments department  Ensure payments are made  Send payments instructions over SWIFT or other means of communication  Follow up on the payment instruction Payments can also originate from securities or foreign exchange deals Payments Back office  A central department

20. 20 Reconciliation department  Reconcile positions for cash and securities  Reconcile movements for cash and securities where needed  More and more automated Reconciliation Back office Reconciliation systems can automate up to about 95 % of reconciliation items  A central department

21. 21 Customer reporting department  Important aspect of customer service because of its visibility to the customer  Once settlement and reconciliation is done  Well automated nowadays  Push and pull distribution methodology Customer reporting Back office  A central department

22. 22 Investigations department  More complex area in the back office  No real automation opportunities  Close management monitoring required Investigations Back office Institutions have been seen to have Millions of USD outstanding in investigations for years  A central department

23. 23 Static data department Data scrubbing and checking Internal feeds e.g. customer information External feeds e.g. Bloomberg, Reuters Back office processing Securities data Customer data Corporate actions information  A central department

24. 24 Corporate actions department Mandatory corporate actions Voluntary corporate actions Bank Issuing company Investor Bank Issuing company Investor Communication for informationCommunication triggers decision ok ?  A central department

25. 25 Some other department  Pre-trade compliance  Post-trade compliance Compliance Back office Efficiency department  Business requirements  Project implementation  Efficiency enhancements Investment funds  NAV department  … …  A central department

26. 26 Table of Contents Back office structure and functions  Overview of a financial institution landscape  Why a back office ?  A central department  Some back office issues to conclude

27. 27 Some back office issues to conclude…  STP, still the buzzword in back office processing?  T+3,T+2,T+1,T+0 What is the discussion all about?  How can a failed trade cost money to the institution?

28. 28 ©2005 Deloitte S.A. Member of Deloitte Touche Tohmatsu