The new-look, proactive middle office

The middle office still has a role to play as the buffer between middle management and the front office – Tsigutkin

Some vendors have been pushing for a more creative role for risk managers for some time. “Instead of merely using middle office risk management for risk measurement, analysis and risk reporting we have been saying for a while that it makes sense to use the technology for more effective trading as an input,” says Alex Tsigutkin of Axiom Labs. “The technology that has been developed in the past was geared to a one-way risk reporting role. With a little bit of ingenuity and a flexible approach from risk managers, those same technology components can become very valuable as an input for trading strategies. By integrating the technology of the back office, risk management and financial control, we aim to give the front office valuable guidance, including trading strategy formulation, simulation, back testing and execution.”

Axiom’s perception is that the middle office has to move in this direction, because the markets themselves are changing and there is now a need to bring knowledge and understanding of the portfolio concept and technology to the trader’s desk.

To Tsigutkin, VaR alone is not enough – it is inadequate without good supportive data – and in particular needs to be supplemented with information about the trading cycle.

However, by applying portfolio effects from the enterprise as a whole to the individual trader, it is possible to steer the trading outcome in terms of risk/reward, capital allocation and portfolio back-testing.

In Axiom’s model, the middle office effectively becomes a research centre for the front office. However, from the technology standpoint, for that to take place a solid data infrastructure is needed. To that end Axiom has built upon its existing Integration Center data integration tool with its new E-Business Command Center . This is designed to provide the middle office with transparent information from any source (be it real-time or historic market data, or historic portfolio data) and also allows risk managers to message possible strategies to front office.

Though Axiom emphasizes the new more creative role for risk management, Tsigutkin still sees the need for a middle office per se. “It will still be needed because there (as nowhere else) the goal is to maintain a bird’s eye view of the whole business,” he says. “At the same time the middle office still has a role to play as the buffer between senior management and the front office. Furthermore, the front office management is still very dependent on what is happening in the back office’s books and the middle office still has a role in keeping them in sync.”

Reprinted with the permission of Middle Office Journal