January 20, 2011 – Fund managers are sometimes cited by broker-dealers, custodian banks, prime brokers and other service providers for being the last to embrace technology and automated procedures.
That's because buy side firms really didn’t have to worry about whether or not they were operationally efficient. They could leverage the software their sell-side counterparts offered them such as execution management systems in combination with some web-based reporting. Investors and regulators seemed to be okay with that in large part because fund managers were operating in a bull market. They could afford to make a mistake or two.
But the days of the spreadsheets are now over. Regulators on both sides of the Atlantic are far more eager to understand just what they are buying and how they are processing their transactions. So are investors.
Fund managers are also realizing they can’t rely on what their trading counterparts and third-party service providers are telling them. The financial crisis made it clear that the risk management capabilities were substandard. Fund managers didn’t really understand what they were buying, the value of their assets and what would occur in the event of a counterparty default. While technology needs will vary between traditional long-only fund managers and hedge fund managers, there will be some consistency in their requiring more inhouse and frequent reporting of portfolio assets and risk.
As a result, investment management firms are quickly dipping into their wallets to buy new technology to ensure what has been termed “transparency.” The following represents a list of the top five technology areas most likely to see an uptick in spending based on interviews Securities Technology Monitor conducted with a dozen operations executives and their software vendors last week.
Risk management: Although business units often calculate risk on a departmental or product basis, rarely was a complete enterprisewide view of risk available. But without that complete view of risk exposures, fund managers are left vulnerable to market, counterparty, liquidity, collateral and operational risk. A thorough risk management strategy includes analytics tools and reporting and governance processes. Firms are also likely to fine tune their risk models internally.
Data management: It’s impossible to get an enterprise-wide view of risk with disparate data sets so fund managers are now focused in creating consistent data models and licensing metadata tools to integrate data more quickly across multiple applications and business units. They are also setting up and setting up more standardized data governance policies on who is responsible for ensuring the accurate, updated and consistent data. “ In 2011it will be critical to implement comprehensive, enterprise-wide systems and processes instead of manually weaving together disparate data,” says Stuart Plane, managing director of data management software firm Cadis. “ By doing so, all users of the data in trading, risk, compliance and back office functions are able to understand where the data came from, what validations were applied and where the data went so that trading and other decisions can be made in real time.”
Client reporting: Fund investors are no longer willing to wait until the end of the month to find out just what their portfolios are worth and how much risk they are incurring. Ideally, reporting will be available by the end of the day or in some cases even intraday. So it’s’ up to the portfolio accounting and management systems to provide fund investors with an integrated view of daily net asset values, performance calculations and risk metrics. “To aggregate and deliver the information, buy side firms need portfolio accounting and management systems which have reconciliation tools to multiple third parties such as prime brokers, trading partners and other service providers,” says Gerry Gualtieri, chief executive of Tradar, a London-based portfolio accounting and order management firm.
Order management and execution management systems: As trading volumes increase and buy-side traders are forced to compete with the likes of high-frequency traders they have some tough decisions to make. Either license an order management platform, an execution management system, or a system that can allegedly do both order management and trade execution called OEMS. Then there is always the option to buy different OMS and EMS platforms and link the two. The decision likely depends on the size of the firm’s trading desk and its strategy, say trade management executives.
Over-the-counter derivatives processing software: These financial instruments appear to be in a category of their own when it comes to IT spending. As a result of the Dodd-Frank Reform Act in the U.S. and similar regulations in Europe, buy-side firms must now automate their middle and back office processing work for OTC derivatives and license or build connectivity, valuation, and collateral management software.. “Some key objectives will be understanding which instrument is eligible to be centrally cleared, the mechanisms to connect with either a clearing broker or clearinghouse directly, how to deal with valuation discrepancies with settlement prices from the central counterparty (CCP); how to monitor what are the margin requirements of each CCP; and where collateral is located, says Zohar Hod, vice president of SuperDerivatives in New York. “Some buy-side firms will buy or build the software directly while others will rely on their clearing agent.”
This story originally appeared on Securities Technology Monitor.
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