Video Series:

Unpacked

Unpack key topics that impact banking, investing, financial services and the wider economy in this award-winning explainer series. 


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In the earliest days of the stock market a trade was an exchange between two people of physical money for physical stock certificates. Since the trade was visible, each person's assets could be easily verified.

 

Today trading is done electronically, with enormous volumes moving through the global markets every day. So how do financial institutions keep track of all those transactions? That's where the middle office comes in. While it may sound like somewhere you go, it isn't a physical location. Instead, it represents what happens behind the scenes after a trade is made. Let's take a closer look.

 

This is: Middle Office Unpacked

 

 As financial markets developed and became safer for investors through regulation, trading volumes reached levels that made it hard to support physical exchanges. In 1971, NASDAQ launched as a fully electronic stock exchange. For the first time, confirming a trade, transferring money from buyer to seller, and recording stock ownership all happened electronically.

 

This new digital market also meant that investors, brokers, and investment managers had to find a new way to verify transactions. Their answer? It would be up to each participant to keep their own record of what was bought, sold, and owned. Then they would compare to make sure things matched.

 

This oversight was the beginning of what would become the middle office, which today has five main responsibilities. After a trade takes place, middle office confirms the details with all participants, things like the kind of asset bought or sold, its price, when and where it will be settled, and any fees to be paid. Next, it oversees trade settlement when the asset is electronically transferred to the buyer's account. Then the asset is closely tracked to ensure it's properly processed and reflected in the accounts record.

 

The middle office monitors cash flows like dividends and interest payments. It also manages tasks like adjusting records after a stock split or replying to a corporate action notification. The process of verifying assets in person now happens through reconciliation. This is regularly comparing digital records, correcting differences, and ensuring all activity is represented accurately across everyone who supports an investment portfolio.

 

Lastly, investment data management, the single most important middle office function. All the transaction and position details, client data, and analytics like risk, performance, and profit and loss must be up to date because this information is used to inform investment decisions and create risk, compliance, and regulatory reports.

 

Let's look at an example with the most common asset class, equities. When trading equities, there aren't many data points to manage, but the overall volume can be a challenge for the middle office. There are 60 stock exchanges around the globe. Across the five US-based stock exchanges, more than 50 million equity trades happen every day, and each firm's trades go through their own middle office.

 

Volatile markets drive greater volumes of trading, placing even more demand on the middle office. Transactions involving other kinds of assets like futures, foreign exchange, loans, and OTC derivatives can be even more complicated. There are often more participants, greater amounts of data, physical paperwork, and non-standard settlement practices.

 

Today, almost all asset classes are traded electronically, driving investor demand for immediate data and insights. In the last five years, the investment management industry has changed dramatically. Investing in complex assets is more common. Market and regulatory changes have challenged operations, and the competition for investor assets and greater returns has intensified, along with the technology and staffing required for an efficient middle office, while the speed, complexity, and data necessary to support their business and their investors is becoming harder to manage.

 

All of these changes are making it more risky and costly to keep middle office operations in-house. So investment managers are now at a crossroads. Many are considering outsourcing their middle office to a service provider with large-scale technology and operational capabilities.

 

So what's next for the middle office? Just like the transition from physical to electronic trading, technology will play a crucial role in helping the functions support growing complexity and volume and provide the insights that help investment decision making. With distributed ledger technology providing the potential solution that offers capabilities like instant verified trade confirmation and settlement to simplify things for the middle office, the question is, how far will technology take this evolution?

 

What happens after a trade takes place? Within the Securities Services business, a function called middle office oversees post-trade operations — and in the digital world, trades are happening at high speeds and enormous volumes. Learn about the critical middle office function and why it’s needed.

The material contained herein is intended as a general market and/or economic commentary and is not intended to constitute financial or investment advice. Any views or opinions expressed herein are solely those of the speakers and do not reflect the views of and opinions of JPMorgan Chase. This information in no way constitutes JPMorgan Chase research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.