Learn 100% online from anywhere in the world. Enroll today!

Middle Office

A team of employees that includes risk managers, information technology officers, and other officers who manage risks within the organization

What is the Middle Office?

The middle office is a department within a financial services institution. It comprises a team of employees that includes risk managers, information technology officers, and other officers who manage risks within the organization, as well as managing information technology.

 

Middle Office

 

Summary

  • A middle office is a department within a financial services institution.
  • The middle office supports the front office by processing transactions negotiated by the front office personnel to make sure that transactions are booked and fulfilled appropriately.
  • Other functions performed by the middle office include risk management, information technology, accounting, and legal support.

 

Understanding the Middle Office

A financial services institution, such as an investment bank or hedge fund, is divided into three main departments – the front office, the middle office, and the back office. The front office is the customer-facing department, and it is the department that makes money for the financial institution. It serves individual and corporate clients directly by offering them financial products that they can buy.

The middle office supports the front office division by offering services such as risk management, information technology, and legal services. The department ensures that the deals and agreements entered into by the front office meet the appropriate legal requirements. The middle office also computes the profits or losses generated by the front office.

The back office is the “engine room” of the financial institution, and it performs functions such as settlements, maintenance of records, human resources, reconciliation, regulatory compliance, and accounting.

 

Middle Office - Functions

 

History of the Middle Office

The term “middle office” was first introduced in 1868 as part of foreign exchange and investment banking. During the period, gold and silver were the standard measures of trade between countries. Banks were mainly organized into the front office and back office, with the front office comprising salespeople and traders who dealt directly with clients.

On the other hand, the back office comprised clerical officers who provided support services to the front office. The middle office division was tasked with calculating profits and losses generated from trade activities between merchants or nations.

After the introduction of paper money, banks allowed government agencies and merchants to trade securities and raise capital to finance trade. Banks acted as intermediaries between the securities traders and earned revenues by charging a commission on the successful trades.

As the banking industry revolutionized, banks reorganized their departments by splitting the back office to create a middle office division to track the transactions performed by the front office. The middle office was developed in response to the growing complexity of financial transactions and the need for financial institutions to manage their risks better.

 

Roles of Middle Office Staff

Middle office employees perform functions that support the operations of the front office in various areas, such as risk management, financial control, strategic management, and information technology.

The department’s employees ensure that the deals transacted by the front office are accurately recorded and processed and that all compliance documents are filled and completed. They also provide the front office with market data related to various securities and financial markets to help risk managers mitigate investment risks that the institution is prone to.

The middle office may employ a dedicated legal team that ensures that the legal documents comply with the existing legislation and industry standards. The financial control function is performed by the accounting personnel, who prepare financial statements in compliance with existing financial reporting standards. IT personnel are responsible for developing software to manage trade activities.

Sometimes, the middle office is seen as an extension of the back office because it performs functions that were originally performed by the latter. Nevertheless, the middle office plays an important role in acting as a link between the front office and back office and assists both divisions by capturing and monitoring important market data.

 

Qualifications for the Middle Office Staff

At the early stages of investment banking, there were only two bank divisions – the front office and the back office. Employees working in the front office were required to have a minimum college degree, while the back-office employees were only required to have high school diplomas.

Front-office employees interacted with clients directly and were, therefore, required to have higher qualifications than back-office staff who performed clerical work. However, with the increased complexity of transactions and the development of technology, the back office was split to create the middle office division. Employees in the division are required to possess a bachelor’s degree, MBA, and other postgraduate courses.

 

How Middle Offices are Changing

With the development of technology, most banks are automating their internal operations, and human beings are being replaced in all three divisions. For example, Goldman Sachs replaced a majority of its equity traders with electronic trading systems as a way to increase its efficiency and cut on operation costs. Jobs performed by traders, salespeople, compliance officers, and risk professionals have been taken up by computer systems.

On the other hand, companies that have retained the middle office division are outsourcing some of their functions to private entities as a way of accessing specific expertise and reducing costs. Other companies are moving some of their middle office functions offshore to countries with highly-educated and skilled professionals but with a substantially lower pay scale.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Disintermediation
  • Management Theories
  • Business Process Outsourcing (BPO)
  • Strategic Management

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!