Bank of Korea outlines its search to find the right technology
While asset management is a relatively new function for many central banks, Bank of Korea (BOK) has been an active investor for the past thirty years. However, after the financial crisis and challenging market conditions, BOK, which has foreign-exchange reserves of $362bn, diversified its asset holdings and upgraded its technology in order to generate greater efficiencies and better manage the operational risks.
According to the 2014 Global Public Investor (GPI) report published by the Official Monetary and Financial Institutions Forum (OMFIF), 157 central banks with $13.2trn in assets are increasingly investing in riskier assets such as equities and, in some cases, longer-term debt due to the prolonged low interest rate environment. Traditionally, they have been conservative institutions, only holding safe short-term bonds.
“We found exactly the integrated front-to-back office asset management system solution that we were looking for”
In the GPI report, Heung Sik Choo, BOK’s former deputy governor, now chief investment officer at Korea Investment Corp., stated that central banks around the world require “a new paradigm in foreign reserve management”. He added, “We need to reconsider the investment universe for central banks. We may need to break away from rigid fixation on bonds of the highest credit ratings, and become more open-minded about expanding the investment sphere into non-traditional asset classes.”
BOK, which was established in 1950, is the world’s seventh largest manager of foreign-exchange reserves and ranks number 19 on the GPI league tables. It broadened its portfolio holdings away from government bonds into corporate debt, developed and emerging market equities as well as gold over the past few years, according to Dong Hyun Choi, Director/Head of Reserve Management Support Division, Bank of Korea. In fact, BOK was among the first central banks in 2011 to buy the commodity which is known to act as a safe haven in turbulent periods. At that time, there was a great deal of uncertainty due to a brittle global economic recovery and precarious debt situations in the US and Europe.
“We implemented it in 2013 and have already seen improvements with our straight through processing and the speed of our performance analysis”
BOK also increased its purchases of gold in 2012 when its investment strategy was steered by Eugene Kim, who became the central bank’s first chief investment officer for a three-year term. He has recently been replaced by Lee Dong-Min, former head of investment strategy at Samsung Life Insurance.
BOK’s more diversified investment approach, combined with the changing nature of financial risk management and the need to gather and process more reliable data effectively, prompted an appraisal of its technology infrastructure. BOK’s systems which had been built over the years did not address the current demands and it was looking for a more integrated solution that linked its back, middle and front offices.
Finding the right provider though has not always been an easy task. As Mr. Choi, who has been in charge of internal systems since 1986, recalls, “From 1986 to 1996 we used our own internal systems but decided to outsource our portfolio analysis and reporting to Portia (a middle-to-back office solution which is now part of SS&C Technology). However, the performance analysis did not meet our expectations so I travelled to Europe in 2002 to look at Trema and OpenLink systems, which were used by most banks in the eurozone as well as Panorama (which was part of SunGard).”
After a public consultation, Panorama, a real-time, straight-through trading, portfolio analysis, risk management and processing solution was chosen. “It was the most cost-effective solution and we used it for about five years between 2005 and 2010,” says Mr. Choi. “However, the software ran on two systems and it did not provide the performance analysis that we needed. We ended up transporting the data from Panorama to a PC-based program provided by a local vendor but that only added an extra step in the process. At the same time our reserves were growing and the local provider did not have the resources to support the additional functionality we required.”
The result was that Mr. Choi was back on the road looking for a new technology provider that could help with its widening asset management universe including FX, money markets, equities, commodities, fixed-income and interest rate derivatives. “We had talked to many different providers but in Calypso we found exactly the integrated front-to-back office asset management system solution that we were looking for,” says Mr. Choi. “We implemented it in 2013 and have already seen improvements with our straight through processing and the speed of our performance analysis. We also run a separate risk management system which is also from Calypso to calculate market liquidity, value at risk and other information required from credit rating agencies such as Moody’s.”
As for other outside vendors, BOK also employs Barclays Point which analyzes index and portfolio data, performs risk modeling across all asset classes, evaluates performance attribution and has multi-asset portfolio construction tools. In addition, the central bank is “working on customizing our technology to meet our collateral management needs in the most cost-effective way as well as looking at how we can get the right pricing sources for our simulation analysis,” according to Mr. Choi.
Given the market dynamics, BOK will continually be fine-tuning and enhancing its technology infrastructure but Mr. Choi says he is comfortable with the platforms and systems they have and does not expect to conduct another search in the foreseeable future.