With Samir Dhrolia, Senior Managing Director, Derivatives, Trading & Indexing, British Columbia Investment Management (BCI)

Briefly discuss your professional background and current role/responsibilities at BCI.

I started my career in cross asset derivative trading in 1999, working for major global financial institutions including Merrill Lynch and Goldman Sachs in New York, and HSBC in Hong Kong. Originally a native of Toronto, my family and I moved to British Columbia in 2016 as my wife is from here. I joined BCI in 2016, as a senior portfolio manager in derivatives. I am currently senior managing director, derivatives, trading & indexing (DTI), responsible for C$35B in equity assets and BCI’s C$13B securities financing program.

The opportunity to join BCI during a time when the organization was transforming from a passive to an active, in-house global asset manager, with a focus on expanding derivatives was a great fit. It’s an exciting opportunity to build a program from scratch for a large institutional asset manager, which is rare in the Canadian pension space.

What is the brief backstory for BCI transitioning to an active in-house global asset manager with a value-added, modern centralized trading framework? When and why was it done?

From 2015-2021 under the leadership of BCI’s second and current CEO/CIO, Gordon J. Fyfe, BCI transformed with the singular purpose of meeting our clients’ long-term return requirements. We did this by partnering with our clients to revise their statement of investment, diversify their asset mixes and sources of returns, decrease our reliance on expensive asset managers, and move away from a primarily passive investment approach.

As clients evolved their asset mixes, BCI also needed to expand our investment offerings and develop trading capabilities to support our clients in achieving their return objectives.

The development of the centralized trading framework began in 2018 and continues to evolve. BCI has developed into a world class institutional investor, and our centralized trading white paper was in response to many inquiries during the pandemic from partners and peers on how we set up our trading desk. This resulted in BCI sharing our knowledge and rich experience in this space, as there was no existing document/paper on how an asset manager could centralize this key function.

What have been the primary benefits from building a centralized trading framework? How are these benefits quantified for the end client?

The primary benefit is our cross-asset view, which fosters a performance-focused team, and offers an environment where employees collaborate across the portfolio management, asset risk and liquidity functions.

By following the centralized trading principle, BCI improves performance, drives down cost through efficiencies, and allows for better management of risk due to the end-to-end view it provides.

Our trading desk maintains end-to-end control of physical and synthetic assets to optimize collateral, securities lending and financing, and counterparty risk management. With a centralized system, complex trading is simplified and compartmentalized to get the best result for each part of the trade. As an example, we can start a transaction with U.S. Index equities and end up with a global customized portfolio, running on a synthetic quantitative portfolio swap platform, while taking care of foreign currencies, cross-currency swaps, interest rate swaps and optimized cash re-investments, and having those investments collateralized and financed in a click of button – all with one financial partner.

Our centralized trading framework streamlines processes, effectiveness, and scalability for continued growth, optimizes management oversight, and strengthens legal, compliance and operational controls, thus reducing a variety of operational and investment risks. We have very close relationships with all other departments within BCI, and they all have a say and a seat at the table. Leveraging BCI’s scale and resources allows for the best market outcomes for our clients and large mandated for our partners, it’s a win-win.

What is the future of BCI’s centralized global trading framework?

The next step is to look at how we can work with our global partners into expanding the framework to inspire cross-asset design, efficiencies and computing power. This would handle a large array of products from end to end, including the pricing, trading, ticketing, valuations, booking into book of record, securities financing and reporting into one smooth functioning technology solution.

Currently each area of the transaction cycle has great technology, but making them all talk, and work together is extremely difficult because they are not engineered and designed to talk to one another. We believe the whitepaper provides a good foundation for setting up that base. At BCI we had to develop in-house tools for this, as nothing currently exists.

What are the challenges, drawbacks and risks to building a centralized trading framework?

Despite the many benefits of centralized dealings, three primary barriers restrict some firms from reaping the benefits, as we outline in our whitepaper.

One barrier is implementation costs, which are linked to a firm’s size. Centralized dealings are not necessarily an ideal solution for small asset managers, given the upfront costs in technology and personnel. Investments include a leading order management system (OMS), fully integrated with execution management systems (EMSs) and transaction cost analysis (TCA) platforms. Small firms could find it hard to achieve economies of scale, as they cannot spread these costs over sufficient in-house trading volumes.

At the same time, the costs of running any type of trading desk (centralized or decentralized) are rising globally, due to increased regulatory, governance and technology requirements. Small firms may have no choice but to upgrade to centralized dealings or outsource their trading. For example, a small firm with only a few portfolio managers may prefer not to segregate the front office roles to reduce costs. However, regulations now require this segregation of duties in some jurisdictions, in addition to back-office functions.

The second barrier is remote work. Centralized dealings are feasible within a work-from-home environment, and the benefits of a centralized trading do not require one physical location; however, asset management firms must tailor their approach to address the risks of working from home to ensure the effectiveness of surveillance is not diminished.

The third barrier is the requirement of specialized skill sets in your human capital. It is vital to continue to source superior talent that is well versed in cross-asset products. Since most setups have been siloed in the past, sourcing cross-asset traders is difficult and requires constant investment in education for your team.

For the complete white paper, go to https://www.bci.ca/media/insights/