Regulatory and Investor Demands Trigger Buy-Side Transparency
Regulatory and investor demands for increased transparency are causing asset managers to adopt new approaches to trade execution and reporting.
“The widening burdens of regulatory reporting are transpiring at the same time as investor demands for more timely, accurate and content-rich information are gathering steam,” according to Kenneth Grant, chairman of ConceptOne, a provider of data management services, reconciliation, risk management solutions and portfolio analysis.
Among the most important developments, according to an Aug. 2012 paper authored by Grant, is the migration to standard investor reporting protocols, such as the Open Protocol Enabling Risk Aggregation (OPERA) standards.
The intent of OPERA is to create a common set of reporting standards for hedge fund investors, which will place them in an enhanced positions to evaluate risk aggregation dynamics across multiple funds to which they may allocate.
“Our experience suggests that the OPERA aria, while starting at low volumes, is moving purposefully towards crescendo,’ said Grant.
“However, whether OPERA or some other agreed-upon set of reporting standards ultimately becomes predominant, it’s clear that the drive towards more frequent and content-rich investor reporting will continue unabated.”
On the regulatory front, the European Union has provided incentives in the form of Solvency II and Basel III.
Solvency II, scheduled for implementation at the end of this year, will require insurance companies to demonstrate the ability to monitor, and hedge, all investment exposures, or else face a capital charge of up to 49% of the allocations.
“Informed hedge funds, seeking to render insurance inflows as compelling as possible, will proactively seek to provide this capital charge-avoiding information,” said Grant.
ConceptOne has developed a series of engines and “workbenches: which facilitate eth capture of data from multiple sources, the application and/or derivation of analytics, and the production of reports.
These include engines and workbenches for Form PF, AIMFD, and Opera, among others.
Transaction cost analysis (TCA) systems “are being redesigned to help portfolio managers craft strategies in real-time by studying trade behavior across a wide spectrum of time increments, or analyze historic data for predictive modeling,” said Ethan Levinson, president of SJ Levinson & Sons, an institutional trading firm.
SJ Levinson’s START is a high-performance set of econometric engines customized to support the buy-side trading process.
“Through a control panel, traders at the client site monitor and adjust the system in real time. SJLS optimizes strategic components to schedule trading and take or pass on liquidity opportunities, in addition to tactical components designed to access market liquidity efficiently, Levinson said.
SJ Levinson & Sons employs a quantitative approach to its algorithmic offerings. In contrast to the many other algorithmic vendors which use a heuristic approach, where decision making is meant to mimic a trader’s behavior, SJLS algorithms’ decision-making process is based on quantitative modeling.
Developers employing a heuristic approach typically make general assumptions about order input parameters and market conditions for relatively liquid segments of the trading universe. They then apply them to less liquid segments of the market. These broad assumptions often lead to problems in more extreme, but not uncommon situations.
“Although the research, development, and support of sophisticated econometric algorithms require significant effort, their performance exceeds heuristic approaches,” said Levinson. “These models quantify all of the necessary approaches far more precisely and provide more flexibility as parameters and market conditions vary.”
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The new EU regulations come into effect on 3 January 2018.