Operations: global trends

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Not all that long ago, banks' back offices were a mass of paperwork and filing systems. Technology has changed all that. Where previously trades were confirmed by phone or fax, creating an avalanche of paperwork for the operations department, electronic systems now process the vast majority of simple transactions.

One area that has lagged behind on this trend is the OTC (or over-the-counter) derivatives market, which is stubbornly stuck in the dark ages. The process of contract negotiations and confirmations in this market, estimated to be worth some $400 trillion, is still largely paper based.

Backlogged confirmations jumped 250% from June to August last year, according to a report by TABB Group, and has been rising by 30% a year since 2002. But OTC clearing is starting to play catch-up in the tech race: spend on OTC derivatives automation could rise to $120m by 2010, according to the report.

Front-office redundancies might hog the headlines, but banks have also been quietly making staff cuts in their operations businesses. In many respects, this is only logical - if trading volumes fall and there are fewer front-office people to support, operations will inevitably be squeezed.

Morgan Stanley, for example, has made redundancies in this area, and Citigroup is looking to cut costs in operations by up to 20%.

In the UK, the Financial Services Authority (FSA) has picked up on this penny-pinching and urged banks to stop firing staff. It noticed that back and middle-office operations were becoming increasingly stretched and demanded improved checks to prevent mis-pricing of trading positions.

At the same time, banks are shifting more and more of their operations activities to cheap overseas locations, such as India and the Philippines. In 2007, a report by consultancy Deloitte said financial services offshoring had increased 1,800% in the previous four years.

Most investment banks already have some of their operations staff in India. JPMorgan is setting up a vast 5,000-strong back-office hub in Manila. Singapore and Poland are also becoming locations of choice for offshoring operations functions.

The good news is that no matter how many operations staff banks employ to do 'basic' work overseas, they will always need people to manage projects and work on more complicated processes closer to where the front office is based.

Click here for an explanation of the operations sector.

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