The buy side upgrades its technology

New market realities are prompting buy side firms to upgrade their technology infrastructure and embrace the IBOR Services Matrix*

It’s a tricky time for asset managers. Difficult markets, increased regulation, stiff competition, fragmented infrastructure, and demanding investors are just some of the issues facing the industry.

There’s no silver bullet to handle all those challenges, but adopting the IBOR Services Matrix can certainly help minimize their impact (IBOR – Investment Book of Record).

The IBOR Services Matrix is a technology approach that consolidates 100% of a firm’s data – atomic, derived, and reference – into a single repository that is accessible in real time from the front office to the back. Aggregating this information and displaying it in a coherent, enterprise-wide view requires a thorough, well-designed architecture. The result is a scalable infrastructure that reduces both the costs and risks of doing business.

Replacing legacy systems and existing workflows is a daunting task, but there are several important reasons to make the investment in this strategic technology upgrade.

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Derivatives Are Different

Derivatives usage continues to increase on the buy side – a trend expected to continue as managers look to improve returns, hedge risk, and gain access to a wider range of assets.

The proliferation of derivatives is exposing the deficiencies in many commercially available portfolio management systems. Even solutions built within the last decade are frequently designed on a two-event scenario: an instrument is bought at a start price and sold at an end price. Derivatives aren’t so straightforward – they require multiple lifecycle events over several years and demand a flexible “contract shell.”

A common example is a forward interest rate swap. There’s a start date in the future, multiple rate resets during its life, repricings, drawdowns, and rollovers. Any system without a contract shell design structure to enable these components is severely limited in scope; managing cash flows, dates, and transactional events above the simplest investments is likely infeasible.

“The proliferation of derivatives is exposing the deficiencies in many commercially available portfolio management systems”

Collateral Is Critical

Beyond the fundamental technical issues with processing derivatives, collateral optimization presents another opportunity for improvement. Collateral management should extend across the front, middle and back offices, but for many firms it is exclusively a middle office function.

If pre-trade analysis can’t determine and optimize funding costs, asset managers are operating without a key component of any derivatives strategy. Additionally, revenues, fees, haircuts, and margin must be tracked. When coupled with the upswing of trade volume through central clearing counterparties, central securities depositories, and other utilities, spreadsheets simply will not suffice.

Reporting Is Required

Regulatory compliance is another area that benefits from a high-functioning data infrastructure. Between MiFID II and EMIR mandates, investment firms must report all executed transactions to designated national authorities. Even hedge funds must report assets under management.

While executing brokers and custodians can outsource some of these functions, at the very least large asset managers will still need to have auditable oversight.

And there’s no reason to expect simplified reporting requirements any time soon. Mandates will likely continue to expand, exposing asset managers to regulatory risk if they can’t efficiently process the necessary data.

Risk (Management) Is Reward

To exceed clients’ performance expectations, robust portfolio analytics and risk management capabilities must be implemented. Ensuring that the depth of analysis is sufficient, however, is not simple using traditional architecture.

Not only must all data – security IDs, reference data, pricing, and valuations – be aggregated, all cash flows and lifecycle events from contract initiation through termination must also be incorporated.

Compounding the challenge is the rapid acceleration of trading operations. Real-time capabilities are no longer a pipe dream. They are at the core of today’s business. See page 41 for our article about real-time investment risk.

Matching the speed of transaction processing hasn’t been seamless, but analysis within microseconds is now the reality – even if some Greeks persist with multi-second cycles to maximize investment in capabilities that offer the most return.

Without the requisite foundation of efficiently aggregated data, asset managers’ risk management capabilities and investments in portfolio analytics will be inherently limited.

Reporting Equals Retention

On the surface, client reporting seems like a simple task with no immediate benefit for the asset manager, but that’s not the case.

The depth and frequency of client reporting have increased, leaving the days of monthly reports behind. Clients now require quantitative reporting on both historical and current performance as well as qualitative analysis explaining how performance was achieved. Layer in any visual components and client urgency, and the task has evolved into a complex endeavor.

As competition among asset managers continues to grow, attaining and retaining clients has become more involved. While the push for investment in reporting is a reactive measure, showcasing portfolio performance, analytical capabilities, and strategies can be a valuable marketing tool for current and prospective clients.

“25% of asset managers still rely on manual processes – such as faxes – in daily operations, with the majority still highly dependent on spreadsheets”

The Next Step

Securing cross-product capabilities for trading, compliance, and reporting has become mission critical; 25% of asset managers still rely on manual processes – such as faxes – in daily operations, with the majority still highly dependent on spreadsheets. While smaller firms may be able to make do with a patchwork of systems, larger firms need to do more.

Migrating to the IBOR Services Matrix is a unique opportunity for asset managers to invest in technology with enterprise-wide benefits. Only by shedding the concept of multiple, siloed books of record and rebuilding their core infrastructures can large asset managers seize the opportunity today’s technology provides.

The onus of innovation is squarely on the buy side as the industry becomes more competitive. Exploring new products is a strong start, but to thrive in these unfamiliar waters, asset managers must rethink IBOR.


*This article has been adapted from James Wolstenholme’s white paper, “Inside the Matrix: The Future of IBOR,” published by Celent, November 2015.