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Investment banking is somewhat of a generic term that equates to niche finance activities, complicated financial instruments and high

risk and reward outcomes. Newspaper articles abound with articles of excess during the successful times, together with reports of staggering losses in a leaner era. Behind the headlines, it may be useful to gain a basic understanding of how investment banks are constructed, so that we can obtain a better insight into their activities and how these are controlled and managed. The standard investment bank divides its functions into three overall sections: front, middle and back office. The front office is the client-facing component and undertakes the transactions. The middle office oversees the front office and manages risk and compliance, with the responsibility for ensuring adherence to internal controls and regulatory requirements. Finally, the back office undertakes support roles, such as IT and operations, ensuring transactional information is correct. Clearly, this is a very broad overview of the distinction between the three sections. We can this down further, by briefly describing the activities within the three offices. The front office comprises corporate finance, which advises companies on making decision that will augment their corporate value, such as managing investments, raising finance and dealing with mergers and acquisitions. The front office also includes the sales staff, who act as the relationship managers for clients, suggesting sales and purchases of shares, funds, derivatives, securities and so on and the traders who perform the transactions. In theory, there is a Chinese wall between the advisory function of corporate finance and the markets division of sales and traders. In addition, there are researchers who analyse market information and make suggestions to the sales and trading staff and finally, a structures team, which develops financial instruments and packages them for the banks clients. The middle office can be viewed as the policing function of an investment bank, and consists of risk management and compliance. The risk management team seeks to limit the banks exposure to overly adverse trading positions and can restrict exposure by placing caps on trades. Compliance officials are tasked with ensuring the bank adheres to regulatory requirements and controls. Lastly, the back office contains the operations team, which checks the data of the trading desks transactions and ensures these have been performed as per instructions. It is also where IT sits, which is responsible for ensuring trading platforms are running correctly and that the banks IT systems are properly maintained and secure.

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