After years of investment in front office technology to streamline workflows in the face of squeezed trading margins and higher trading costs, investment banks and brokers now are focusing on enhancing the efficiency and efficacy of middle office systems by investing in resilient software that offers fast and effective processing. The often forgotten but essential middle office is now front and centre of the capital markets industry’s change management plans.
It is no secret that the middle office has been lacking in investment for many years in most banks/brokers. Much of the little investment in the middle office to date was driven by regulation and the need to comply. In Europe, ESMA’s revised Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR) highlighted the need for firms to focus on internal processes and systems to ensure that they were robust and resilient. In effect, front offices became more dependent on effective post-trade processing to ensure they met the new regulatory obligations.
Although, trading firms are still dealing with the runoff from MiFID II, the middle office is also addressing changes required by the third phase of the EU’s Central Securities Depositories Regulation (CSDR) known as the Settlement Discipline Regime (SDR). This regulation aims to harmonise operational aspects of securities settlement and incentivises quicker settlement, with mandatory buy-ins and cash penalties to lessen both the impact and the number of settlement fails. In June 2020, the UK announced that it will not implement SDR, signalling perhaps the beginning of a regulatory divergence and creating both uncertainty and opportunity for firms operating in the UK.