Data Analytics, Risk Management and Front Office Tech amongst top investment areas for Heads of Operations

SimCorp InvestOps  have released information from a report on Front to Back Investment Operations, in which 100 heads of operations at North America Buy-Side Firms participated in.  A summary of the report is produced below:

Today, the industry is firefighting its way through a data explosion and risk management, and front office technology are caught right in the middle. It is perhaps not surprising that these are the investment areas highlighted in the survey. However, there are limits on the performance gains from a cutting edge front office tool, if it ties into a twenty-year-old middle or back office system. Especially for firms trading newer and more esoteric asset classes, many of which may not have been invented when their back offices systems were rolled out.

In order to truly achieve operational agility and maximise on technology investment, firms should be looking to consolidate the front, middle and back office to a ‘whole office’, one integrated platform, for the entire investment lifecycle.

An integrated platform or Investment Book of Record (IBOR), provides investment managers access to a real-time view of all positions, exposure for the entire range of asset classes and instruments. This is especially vital for front office, but also the counteraction of new and valuable forms of data, such as sentiment analysis on social media. In doing so, utilizing a whole office approach, delivers the tools asset managers need, to reduce operational risk and compete successfully now, and in the future.

Marc Mallett, VP of Product, SimCorp North America: “A well thought out IBOR solution should provide full instrument coverage, support position management, cash and securities forecasting, provide reconciliation and exception management, properly calculate valuation, accruals and analytics.  Additionally, a fully functional IBOR should integrate with up and down-stream systems, support online views of information including the ability to drill-down and through more details.  These attributes would directly support all areas of investment.”

Buy-Side Strategic Objectives

  • Automation, Multi-Asset Class Strategies and Regulatory Compliance are the top three strategic objectives for 2017, according to North American Buy Side Firms.  

The historical reliance of investment managers on best-of-breed and legacy technologies, has over time led to complex, inefficient operations and elevated vendor risk. Low automation caused by the many disparate systems in use, together with increasing regulatory pressures, are now creating a crippling drag on investment performance. At the same time, the industry is moving towards a multi-asset class approach, where clients are not just coming to firms for an equity or fixed income mandate but more so, for alternative forms of alpha. The challenge for investment firms, is figuring out what systems there are, and whether they can support these growing multi-asset class strategies.

Fragmented infrastructure, manual reconciliation, and lack of automation are big concerns. But there is a real mind-shift required to overcome them; with the adoption of integrated systems that have scalable capabilities across the front, middle and back office. These systems benefit firms with an organizational view, creating value by driving down costs, increasing efficiency, agility and ultimately improving investment performance.

When you have an integrated platform that is covering the length and breadth of the investment lifecycle, introducing a new asset class or instrument, for example private debt, becomes a lot less complicated. If you look at a firm, which may have multiple disparate systems or service providers, they need agreement from all parties, if or when a new asset class can be supported. When you have an integrated platform, you limit the number of touch points and the time taken to add a new product type, by a great deal.

For the asset manager, this could be the difference between winning or losing an investment mandate.

Marc Mallett, VP of Product, SimCorp North America: “When considering the responses in aggregate, what jumps out is the need for modern, whole office, cross-asset class solutions.  It is very difficult to achieve automation across numerous, disparate legacy platforms.  The more an investment manager can simplify their system architecture, the better positioned they will be to automate and realize efficiencies.”

Regulation

  • North American Buy Side Firms, declare Mifid II, Dodd Frank and shorter settlement cycles, as most challenging regulations for operations and compliance.

Despite the impending January 2018 deadline, the middle and back office functions within buy side firms are still struggling with implementation and compliance of Mifid II. This is no surprise, given the complexity of these regulations but more so, because of the critical levels of manual workarounds fund managers find themselves having to do, to fill the gap that the legacy technology or best of breed systems in use, fail to deliver.

In a recent survey, TABB Group revealed half of senior front office personnel take at least an hour out of their day to unravel errors caused by ‘bad data’, which detracts from the time devoted to actual trading. Additionally, the regulation on shorter settlements cycles, coming this September will further impact these workflows, and require improved risk management, effectively aimed at streamlining the investment lifecycle from front to back.

An Investment Book of Record or IBOR, which underpins a unified platform, rather than several best of breed systems welded together, eliminates these manual workthroughs improving transparency from an organisational view, with clear audit trails and improved data lineage. Ultimately buy side firms are better placed to deals with increased regulation with one integrated solution than with many disparate systems.

Marc Mallett, VP of Product, SimCorp North America: “So much of this comes back to data lineage, accessibility and accuracy.  A lack of a single source of truth, like an Investment Book of Record, requires investment managers to develop desktop solutions for data collection, reconciliation and reporting.  The lack of centralization and automation creates significant operational and reputational risk – reporting inaccurate or incomplete data is a likely outcome.” 

Outsourcing 

  • Outsourcing is still the primary method (39%) employed by North American Buy Side Firms looking to simplify operating models. This, despite expressing dissatisfaction with outsourcing partners; ‘lack of flexibility’, ‘inefficient workflows’ and ‘lack of control or access to investment transaction level data’- forming top three complaints. 

Many companies turn to outsourcing to overcome deficient in-house expertise, however more and more are voicing concerns around relinquishing control to outsourcing providers, who may not possess either the business-specific knowledge, or the most efficient systems to serve with. Sometimes both.

More troubling, is the fact that some of the top outsourcing providers also support their firm’s asset management arm i.e. the competition. In these unique circumstances, the internal clients are typically a higher priority than any external client and this can really hurt the economics of an investment firm’s business.

Furthermore, one of the major challenges with this approach, is the inability to withdraw. Once a firm gives up control of the processing environment, it is very difficult to take it back. A worrying situation if the service quality and timeliness offered by the outsourcing provider, is far less than expected or promised. And this is a commonplace, because many of these IT-specific providers are not making money supporting middle offices and therefore cannot justify hiring, retaining and training the most appropriate, well qualified resources. For this reason, they cannot invest in the platforms necessary to stay ahead of market requirements and support the investment managers’ growth potential.

In truth, the conventional view of outsourcing, with its traditional bias toward low-value, process-intensive tasks, ignores conflicting agendas between outsourcing providers and their clients’ need for timely and accurate data, critical for informing investment decisions. There is no conceivable way for outsourcing to be better, faster or cheaper than partnering with established, singularly focused investment software vendors, leaving the firm to focus on how to best staff, structure and organize its middle office/IBOR team.

Marc Mallett, VP of Product, SimCorp North America: “Does outsourcing really help you simplify your operating model?  Many investment management firms end up with a hybrid operating model, with some functions outsourced and some in-house. Adding further complexity to the system. Moreover, many outsourcing providers are pushing for “Enterprise” solutions; essentially centralization and lower cost centers. These projects are focused on driving down costs with little regard for the impact on service quality. This can be seen in the first of the three complaints; lack of flexibility in dealing with customised complaints.”

Blockchain 

  • 79% of North American Buy Side Firms believe blockchain technology can be implemented in the financial markets 

Whilst the vast majority of North American buy side firms believe in the benefits of blockchain and its ability to revolutionize financial markets, the development of this technology needs to be approached by the investment community as a whole in order for true change. Siloed efforts by individual organisations will only serve the create the same limitations, we are seeing today, with best of breed technology.

Ubiquitous distributed ledger technology, could reduce the friction created in financial networks, with the different intermediaries use of diverse technology infrastructures. In theory, the distributed nature of blockchain could also reduce or altogether remove the need for intermediaries to validate financial transactions.

This new potential infrastructure is a possibility for buy-side firms and end users to not only trade and settle on their own, but also create their own products. This could be in the form of smart contracts in which business rules implied by a financial contract are embedded in a programming language, and executed with the transaction.

At this precipice, investment management vendors should be watching this space very carefully. There are one of three possible outcomes for the future of Blockchain:

  1. Total disruption of financial services

Under the most optimistic scenario, distributed ledger technology would become the primary means of issuing, trading and settling financial assets. Effectively, all financial assets would move to a pervasive and persistent, distributed and reliable transaction cloud. This “Blockchain Book of Records” would provide a record of all transactions, and hence ownership, for any product.

2. Partial adoption

A slightly less disruptive scenario envisages a significant level of adoption of blockchain technology only for the issuance, trading and post-trade processing (including settlement) of illiquid products that currently exhibit a low level of automation.

3. Not living up to the hype

Finally, it is also possible that the innovation and investment in the area of blockchain will dry up or end abruptly. There could be several reasons that precipitate this. For instance, a significant financial crisis or the possibility that various different regulatory authorities make discouraging moves towards a decentralized market infrastructure.