It is optional in the sense that you may choose not to set up multiple entities at this level of hierarchy. However, at least one Agent Institution must be set up for each Institution, so that Customers could always be linked to the Institution at the Agent (branch) level.
The Agent Institution details are those that may or may not be the same for each Agency as for the Institution itself, such as Agent Institution Address, Contact Persons, Institution Type, Agent Institution GL Scheme, Agent Limits, etc. Obviously, if there is only one Agent Institution, most of these details are likely to be the same.
Agent Institutions can have their own Banking System and Application Interface files, but they will have to have the same format as those defined for the parent Institution, and financial processing for the Agent Institution will also take place in compliance with the rules defined for the Institution it belongs to.