Trade (finance)
In financial institutions and large companies in the non-banking sector, trading is the term used to describe the functions and organizational units that are entrusted with the conclusion of foreign exchange , money market , capital market transactions and derivatives .
General
The separation of commerce ( English front office ) and management ( English Back Office ) is banking a banking regulations required segregation of duties , the conflict of interest should be avoided. The task of the trading divisions in credit institutions is, on the one hand, to resell the financial products acquired by bank customers in interbank trading or on stock exchanges or to sell financial products from interbank trading or stock exchanges to customers ( customer business ) and, on the other hand, to conduct proprietary trading . The processing of these transactions, in particular through booking, takes place in the back office, the control and monitoring of these transactions in the risk controlling and / or risk management ( English middle office ).
The term treasury is occasionally used for the departments involved in trading , although this term can have a different meaning from company to company depending on the process organization . The term front office, which has meanwhile also become established in German-language specialist literature , is therefore more precise and clearly refers to the department that concludes financial transactions.
Legal issues
The separation of functions is prescribed in the minimum requirements for risk management (MaRisk) of the Federal Financial Supervisory Authority (BaFin); for non-banks it is considered best practice . According to BTO 2.1 (MaRisk), the decisive principle for the design of the processes in the trading business is the clear organizational separation of the trading area from the functions of risk controlling as well as processing and control up to and including management level . The trade closes the deals , the settlement issues the deal confirmations and accounts .
Field of activity
In both financial institutions and companies, the front office is responsible for optimizing liquidity and minimizing risks. In financial institutions, in which dealing with financial products is part of the company's core business , generating income is an additional task. As a rule, there is therefore no front office, but rather specific trading departments whose activities are limited by risk limits such as value at risk limits. In contrast to the general idea, speculative transactions within the framework of proprietary trading are only permitted to a very limited extent and are constantly monitored and limited.
When companies are speculative activities are not permitted in the rule. Internal company guidelines generally only permit the conclusion of derivative transactions if there is a corresponding underlying transaction or exposure and the transaction reduces, rather than increases, the company's financial risk . Depending on the risk structure of a company, hedging against financial risks from price fluctuations in foreign exchange , interest rates , raw materials or commodities can be included. Depending on the type of entrepreneurial activity, weather derivatives are also used if the company results are heavily dependent on the weather ( seasonal operations ).
Transactions that are concluded through a front office are still concluded to a very large extent by telephone. For example, a money dealer from a company that belongs to the front office stores the excess liquidity that the cash management planner has identified on the same day as so-called overnight money , in which he obtains comparative quotations from the money dealers of different banks. He does the business at the bank where he receives the highest interest rate. Since the year 2000, trading platforms have increasingly been established that use the possibilities of the Internet . The investment business that is to be done here is then practically auctioned. The deal is made with the bank that offers the highest overnight rate.
Process organizational classification
As part of the separation of functions , the front office is supplemented by processing, which carries out all activities relating to confirmation and payment transactions . Auditors generally make sure that companies ensure a strict separation between these two departments in order to avoid criminal acts. Investigations of some spectacular cases of fraud in the area of financial management, such as the case of the Barings Bank , which individual employees could commit, show that these acts were facilitated by a poor separation between these two areas.
In large companies in which the use of derivative financial instruments is part of entrepreneurial risk management ( hedging ), financial risk controlling is usually also established. With a good process organization, the reporting lines from the front office and financial risk controlling only come together at the level of the chief financial officer or the manager responsible for financial management. At German credit institutions, the banking supervisory authority stipulates in the minimum requirements for risk management (MaRisk) that, as a rule, different managers are responsible for trading on the one hand and for processing and risk controlling on the other. This organizational separation also applies to the front and back office in accordance with MaRisk BTO 1.1.
