Treasury Back Office

The treasury back office is the operations function that processes the transactions agreed by a treasury's dealers. Once a foreign exchange, money market, securities or derivatives deal has been struck, the back office checks it with the counterparty, arranges the payments and deliveries it requires, reconciles the resulting cash and positions, and makes sure it is recorded correctly in the accounts. It exists in banks and in the corporate treasury departments of larger companies.

The function is one of three into which treasury work is conventionally divided. The front office, working in the treasury dealing room, executes deals; the treasury middle office measures and monitors risk; the back office completes the transactions. The essential point is independence: people who commit the organisation to deals must not also be the ones who confirm and pay them. This segregation of duties is among the oldest controls in treasury operations.

The work follows the life of a deal:

1. Deal verification. Each deal entered by a dealer is checked for completeness: counterparty, amounts, rates, dates and settlement details. Deals outside normal terms or with new counterparties are queried.
2. Confirmation. A trade confirmation is sent to the counterparty and the incoming confirmation is matched against it. Differences are resolved before any money moves. Between banks this is largely automated through messages carried over SWIFT.
3. Settlement. On the value date the back office releases the payment instruction or securities delivery, using standing settlement instructions held for each counterparty, and checks that the incoming side has been received. Eligible foreign exchange trades may settle through Continuous Linked Settlement, which removes the risk of paying one currency without receiving the other.
4. Reconciliation. Balances on bank accounts are compared with the treasury's records through nostro reconciliation, and positions in securities and derivatives are agreed with custodians and counterparties.
5. Accounting and reporting. Entries are passed to the general ledger, interest accruals and valuations are posted, and regulatory and management reports are produced.

The back office also handles events during the life of a deal, such as interest rate resets, coupon payments, rollovers and maturities, and it manages margin calls where trades are collateralised.

Several controls are standard. Dealers have no access to settlement systems or to counterparty settlement details. Confirmations are sent to and received from the counterparty's operations area and never routed through dealers. Changes to standing settlement instructions are verified independently, usually by a call back to a known contact, because altered payment details are a common route for fraud. Payments are released under dual authorisation, with limits by amount. Unconfirmed deals, unmatched items and failed settlements are reported daily by age, and reconciliation breaks are investigated promptly. Dealer telephone lines and electronic chats are recorded so that disputed terms can be checked.

The importance of these arrangements is shown by cases of unauthorised trading. The collapse of Barings Bank in 1995 followed losses run up by a trader in Singapore who also supervised the settlement of his own deals, which allowed him to conceal positions in an error account. Later cases at other banks involved fictitious offsetting trades that were never confirmed externally. Supervisors' guidance since then has treated an independent back office, with its own reporting line, as a basic requirement.

Deals flow from trading platforms into a treasury management system or a bank's trading and settlement systems, which generate confirmations, payment messages and accounting entries automatically. The aim is straight-through processing, in which a correctly entered deal reaches settlement without being re-keyed. Staff then concentrate on exceptions: trades that fail to match, payments held by screening filters and breaks in reconciliations. Many organisations have moved back office work to shared service centres or outsourced parts of it, which lowers cost but requires clear service standards and oversight.

The back office is the main line of defence against settlement risk, payment errors and many forms of operational risk. Typical failures include paying the wrong counterparty or amount, missing a cut-off time so that an account is left overdrawn or funds lie idle, failing to exercise or roll a maturing deal, and booking a trade late so that positions and liquidity forecasts are wrong. Late or failed payments can lead to interest claims from counterparties and, in payment systems, to knock-on effects for others.

In a bank, the back office processes very large volumes for the bank's own account and for customers, is organised by product, and connects directly to payment systems, securities depositories and clearing houses. In a non-financial company, the team is small and the same principles are applied in proportion: at a minimum, the person who deals does not confirm, pay or reconcile. Where staff numbers make full separation impossible, compensating controls such as independent review by the finance function and bank-side payment limits are used.