The back-office is a key function for any energy-trading firm, and associated responsibilities are often consolidated under the term "Trading Operations". In this part of our blog series, we will elaborate on existing challenges and share thoughts on pathways to achieving excellence in daily business. We will focus on the question of how back-office departments manage to keep up with ambitious growth strategies and the internal pressure to ensure effective, reliable, compliant and cost-efficient operations.
The back-office operations of energy-trading firms are facing a confluence of factors that are dramatically increasing operating complexity, including:
- Growing prevalence of non-standard, structured products.
- Multi-jurisdictional operations.
- Higher trading volumes from high frequency/ algorithmic trading.
- Increasing data volumes across the deal lifecycle.
- Regulatory compliance (e.g. REMIT, EMIR, MAR, MiFID II).
- Internal pressure to adapt and keep operations at low-cost.
While standardisation and automation is achievable across large parts of the deal lifecycle for exchange-traded products, structured OTC products, such as purchase power agreements, typically require individual and more manual end-to-end processing. Combined with a general increase in trading volume, internationalisation, and regulatory compliance, the level of resource and skill required to efficiently run a back-office has changed beyond recognition.
Meanwhile, the back-office is under pressure to keep or improve the level of quality, reliability and efficiency in daily operations. Against this backdrop, back-office teams are often working with antiquated systems and IT infrastructure, and low-levels of automation. Investments in process and system improvements are historically weighed up against cost-saving considerations, rather than seeing those investments as the foundation enabling front and middle office operations to pursue value-generating activities.
In this context, it is crucial to take stock of existing challenges and to develop a clear understanding of future business requirements. Back-office departments need to react and challenge their operating model, paving the way to excellence and adapting to changing market requirements.
We believe there are seven fundamental considerations that must be resolved as a first step towards efficient energy-trading operations.
- Adoption of the Target Operating Model (e.g. Exchange vs. OTC Teams).
- Articulation of back-office business and technical requirements.
- Identification of required skill sets (both business and IT).
- Agility in new product approval and system set-up (e.g. deal-entry-to-payment).
- Automation of end-to-end processing for exchange traded products.
- Target-oriented usage of new technologies and tools (e.g. Robotic Process Automation).
- Active participation in defining the trading IT roadmap
Even though the back-office is often overlooked in the strategic decision process, it is important to understand that a well-placed and organised back-office department, from a system, process and organisational perspective, is vital to any energy-trading firm. While there are different ways of attacking existing operational challenges, the goal is to set up an environment that is self-sufficient and adaptive, to support trading activities and future business growth.