The investment book of record

One version of truth from front to back office

Read article and learn about:

  • IBOR as a concept and architecture frame
  • One version of the truth from front to back
  • Pros and cons of various operating models
  • Building the case for IBOR

About the author:

Marc Schröter is Senior Vice President at SimCorp and Head of Product Management.

Marc is responsible for the product strategy for SimCorp Dimension®. He has been with SimCorp since 1995 and has worked as a consultant with investment managers on virtually all aspects of front-, middle- and back-office operations. He holds a Master’s degree in Engineering from Aalborg University and a Bachelor’s degree in Finance from Copenhagen Business School.

Portfolio managers and traders rely on high quality and up-to-date position data to make the right investment and trading decisions. Yet, exactly that is an ongoing concern in particular for asset managers sourcing start-of-day (SOD) positions for front office from external outsourcing providers or internal accounting systems. This article explains how setting up an investment book of record, also known as an IBOR, could be the answer.

While IBOR is emerging as a potential way to achieve a holistic view of across the enterprise, so far no accepted IBOR standard has been established and the potential costs and time-to-market are often perceived as daunting. Currently, many asset managers are evaluating their options and ways forward.

Basic differences in portfolio and position views

In a globalized world, where portfolios are traded around the clock, fundamental differences still persist between front- and back-office views and needs.

On the one hand, back office and accounting are primarily concerned about end-of-day processing (EOD), closing the books accurately according to fund domicile EOD. Front office, on the other hand, requires correct SOD balances according to where the portfolio is managed. It needs an accurate view on positions and investable cash and to have portfolios updated with intra-day changes due to trading activities, corporate actions, collateral management events, resets and more.

Further, back office wants to look at balances per custody account for settlement or per general ledger account according to local or international accounting standards, whereas front office wants to view positions by manager, asset class, strategy, hedge or similar groupings.

Pros and cons of various target operating models

Some asset managers have a target operating model (TOM) where they manage investments, operations and accounting in-house by use of integrated systems. An integrated system provides transaction lifecycle support and one common position record. This setup offers the possibility of applying different views on the positions according to front-, middle- or back-office needs. There is only one version of positions, serving as the common denominator for both front- and back-office users.

Other asset managers have an outsourcing-based model that is often combined with a component-based system strategy where different systems support a specific process or asset class. This setup leads to a typical architecture as shown in Figure 1. For these asset managers, service providers or in-house accounting systems maintain EOD records – records that are also referred to as a so-called accounting book of record (ABOR). Each morning, the front office systems receive SOD positions based on an ABOR and overnight events such as coupons or redemptions. Intra-day, the front office systems handle the impact of trading activities, often called a trading book of record (TBOR). The problem with this architecture is that neither TBOR nor ABOR holds the entire truth. The TBOR is first of all dependent on the quality of the SOD positions and it holds no position history nor captures all intra-day events not originating in the front office. On the other hand, an ABOR lacks information about simulated trades or pending orders and often intra-day trades are not updated online.

TBOR versus ABOR in a target operating model Journal SimCorp

Figure 1. TBOR versus ABOR in a target operating model based on outsourcing investment operations.

The investment book of record's purpose is to combine TBOR and ABOR in a complete and up-to-date front office-based view on current positions and exposures, including all events no matter their origin. It must handle transaction lifecycle status and show current as well as historical and forecast securities and cash balances as these elements change, providing an accurate basis for front-office decision-making and risk assessment at all times.

In summary, organizations with in-house operations and integrated system strategies generally only have one book of record so there is no need for a separate investment book of records. On the other hand, those outsourcing operations and accounting or having a component-based system strategy typically do not have one place from which to obtain the fully consolidated overview and therefore would benefit from having an IBOR.

IBOR concept and architecture

Figure 2 illustrates the IBOR concept. The principle is that a number of source systems feed IBOR every time a new event is captured or there is a change in status. The IBOR keeps track of the entire lifecycle of the transaction.

Based on the positions and event schedules per security or contract, the IBOR can project the future security and cash positions. The event schedules include all kinds of events, such as bond cash flows, maturity of a swap contract, forecast dividend payouts or expected restitutions.

The IBOR positions are the foundation for all receiving systems (some of which are also source systems), and also the basis for reconciliation with custodians or other systems. If the IBOR also provides valuation services and key ratios, this would ensure consistent valuation across the receiving systems. With this approach, the IBOR could also form the basis for reporting based on up-to-date positions.

Some regard the IBOR as similar to a traditional data warehouse, but the IBOR is much more than that. It contains advanced business logic for event-handling across instrument types including complex products (e.g. OTC and ETD, structured products or alternative investments such as private equity or property), position management and forecast capabilities as well as valuations and key ratios such as exposures.

A typical IBOR architecture Journal SimCorp

Figure 2. A typical IBOR architecture.

Building the case for an IBOR

While an IBOR project often competes with business development and regulatory compliance projects for funding, the challenges of doing without an IBOR are very real. This view has gained marked traction across the industry as the many benefits of introducing IBOR have become clearer.

For the front office, the benefits of an IBOR reside in minimizing the risk of wrong investment decision-making because of poor quality, incomplete or imprecise position data, as well as of having an inaccurate and incomplete picture of risk exposures.

The post-crisis financial environment and legislation such as Dodd-Frank, EMIR or Solvency II have highlighted the need for having an accurate, online view of risks such as counterparty exposures across all asset classes including collateral and exposures to underlying of derivatives – capabilities that can only be provided based on a solid IBOR. In fact, it is more about improving the enterprise architecture – with IBOR as a very important component – than creating a web of individual solutions regulation by regulation. Likewise, the increase in collateral driven by the move to central counterparty clearing (CCP) means that the front office must be able to carry out pre-trade analysis of the most cost-efficient venue for clearing which requires an accurate, online view of current positions, forecast positions and cash, including collateral. Such an intra-day view of positions and entitlements also enables the portfolio managers to take advantage of intra-day custodian cut-off times for corporate actions elections.

For the back office, the benefits of having an IBOR are related to having an independent view of positions. The IBOR provides a basis of control for having multiple service providers, since it serves as a single point of aggregation and alignment across service providers. As well as the more obvious benefits of having that single source of truth, there is a real business advantage in terms of operational flexibility. This is because the IBOR’s existence means that, should the business need arise and depending upon operating model employed: individual outsourced business functions can be brought back in house; retained functions can be outsourced; or migration from one outsourced service supplier to another is facilitated. And finally, the IBOR provides the basis for reconciliation against custodians or accounting systems.

The benefits of establishing an investment book of record can be summed up as follows:

  • Minimises the risk of wrong investment decision based on incorrect data
  • Provides total overview of risk exposures
  • Enables more efficient use of assets due to accurate and complete online view on positions
  • Provides an independent view on positions to create flexibility towards service providers
  • Reduces time spent by operations staff correcting inaccurate position data in current setups
  • Enables reconciliation against custodians or accounting systems

Operating IBOR on a daily basis requires operational resources to keep it updated, but the benefits listed above can provide tangible results. A study by Citi and forward look1 suggests that the operational efficiency of deploying IBOR can contribute to realised investment performance in the range of 50–200 basis points.

Ways to implement an IBOR

There are several ways in which asset managers and vendors can approach the task of implementing an IBOR. One solution, where outsourced service suppliers are used, is for asset managers to insist their outsourced service suppliers offer better position management. However, asset managers with more than one service provider would still be faced with the problem of consolidation and no independent view on positions. Ultimately, asset managers are liable for their investment decisions and should carefully consider if taking charge of good position management is sufficiently important to handle this themselves.

Another approach would be to consider IBOR as part of the front office by extending current OMS capabilities. This would require the OMS handling the full transaction lifecycle and position history as well as event and lifecycle management of areas such as corporate actions, collateral processing and cash management.

A third way would be to build out ABOR to include IBOR capabilities, requiring the accounting system to incorporate functionality to simulate trades and include pending orders as well as timely handling of the transaction cycle for intra-day trades.

Some asset managers may prefer to implement an independent IBOR that is agnostic to OMS’s or accounting systems and service providers. While such an in-house built stand-alone IBOR offers the opportunity to accommodate customer specific needs in terms of events, status flow changes and instruments, it also has the potential of being a huge undertaking.

Leveraging existing standard solutions

An alternative is to look at existing standard solutions like SimCorp Dimension, which provides a flexible and configurable book of records with position-keeping, a transaction lifecycle engine and valuation and key ratio calculations (see Figure 3). These components service front, middle and back office as part of the integrated solution. Its system architecture independently supports book of record functionality and works with other front- and back-office systems.2

The solution contains all the capabilities described in the IBOR architecture section:

  • Customized views on front- and back-office positions based on one book of records
  • Order and transaction lifecycle management to keep track of intra-day trading impact on positions
  • Handling of events across all asset classes such as corporate actions, contract or collateral events
  • Forecast securities and cash positions based on event schedules
  • Advanced business logic for valuations, calculation of key ratios such as exposure and netting of positions
  • Event-based integration to both source and receiving systems
SimCorp Dimension solution components Journal

Figure 3. SimCorp Dimension solution components.

IBOR: getting the most from a standard solution

In periods where budgets are tight, asset managers must look at the most cost-efficient ways of achieving the benefits of implementing IBOR. Vendors such as SimCorp have invested many years in building the advanced functionality IBOR must offer: position management; transaction lifecycle management with full coverage across events and instruments; and extensive business logic.

Reproducing just parts of this is a huge task, which providers of other solutions may struggle to accomplish in any feasible timeframe. By contrast, using a standard yet flexible and highly configurable solution such as SimCorp Dimension affords shortened time-to-market, reduced project risk and costs that are in line with the benefits.

1. Iyer, Chandresh (Citi) and Jovellanos, Chito (forward look): The Missing Link: Operations Improvements Enhance Portfolio Performance

2. Schröter, Marc (SimCorp): White paper on Extended Enterprise Data Management