Transparency starts from within
By Marc Schröter, Senior Vice President, Product Management, SimCorp
We hear the word ‘transparency’ regularly both in the financial media and markets. Investors demanding transparency over their investments and fees. Regulations including Solvency II or MiFID II, focus on increasing transparency in the market. What is often overlooked though, is the equal importance of creating transparency within an asset management firm, as well as outside of it.
With a raft of regulatory changes to come in the next 12 months, from the inclusion of FX into the BCBS-IOSCO Margin Variation Rules, to the introduction of the landmark privacy law, GDPR, operational transparency may just be the antidote needed, to counteract this continually complex landscape. If we put regulation aside, increasing data volumes, multi-asset class strategies and the threat of insourcing are all keeping asset managers on their toes. Adapting the business to operate in a low interest rate, low margin world is top of mind for many asset managers. But what does that mean in operational terms?
“With a raft of regulatory changes to come in the next 12 months…operational transparency may just be the antidote needed to counteract this continually complex landscape.”
One approach to tackling the current situation is to operate on a ‘golden master’ or single source of data, which at the same time, establishes operational transparency. This is no new phenomena of course; a consolidated investment system is an operating model adopted by many asset managers globally. It is however growing in adoption, and with good reason too.
For one, it gives asset managers the ability to manage multiple asset classes on a unified platform, i.e. an Investment Book of Record (IBOR). Two, the automated workflow negates error-prone manual workarounds and equips asset managers with the real-time data they need to make optimal trading decisions, assess where they are under-investing, and detect investment breaches. Research from Chito Jovellanos, President and CEO of the consultancy Forward Look, Inc. suggests improved timeliness and quality of data delivered by integrated solutions, can translate to anywhere between 51-242 basis points (bps) of inherent alpha.
While the transparency brought by an IBOR in the front office can directly correlate to a firm’s bottom line, it can also bring much needed clarity to other crucial areas of the business. For instance, compliance and risk can better calculate exposure during market events. They can also account for corporate actions and cash flows for more accurate forecasting, using real-time and not last night’s data. Further, an IBOR is a big asset for making relevant information, normally only residing in middle and back office, available to the front office. In this capacity, it can for instance enable a portfolio manager to assess how a certain trading scenario impacts portfolio risk, or what the margin requirements are for an OTC trade with broker X versus broker Y.
At the same time, IBOR functionality can best tackle the regulatory demands placed on a firm’s back office. Vital resources no longer have to comb through disparate systems and take into account overlapping time zones to gather reporting data and best execution evidence. Instead, they can be freed up to provide value in other more sophisticated tasks, such as auditing readiness for new regulations, and respond to the increasing number of ad-hoc reports that investors frequently seek.
"The transparency that firms once perceived to be a luxury will become a necessity."
The operational benefits of IBOR technology are clear, but the path towards it is muddied with misconception. Many asset managers working with a tangled web of IT systems underestimate the possibility of IBOR technology, often brushing it off as an idealistic goal. In fact, it can be embedded in a variety of different infrastructures. For instance, we currently see many firms initiate system consolidation projects in the order and execution management space, and it’s a natural first step to introduce the IBOR as part of this, to solve many needs across the front office. To harness true automation, using an architecture that brings you as close as possible to “live” data, firms should look to an integrated system to deliver the quickest, most reliable and correct information across the business.
In 2018 as global asset management continues to be bombarded by market complexity, the transparency that firms once perceived to be a luxury will become a necessity. Asset managers will begin to see the urgency in accessing up-to-the-minute data, and the need for a holistic data approach, not just to sustain, but to empower themselves with the competitive edge required to truly grow.