(This article first appeared in the Q4 issue of GlobalTrading.)

By Karan Dalwani, Trading Specialist, Refinitiv

While the disruption caused by COVID-19 has put the spotlight back on active management, cost pressures and regulatory reporting demands are forcing investment managers to rethink their technology strategy and consider system consolidation in a hosted environment.

1. The use of multiple systems throughout the investment cycle increases operational risk and technology spend. This paves the way for much-needed consolidation.
2. As regulations become more stringent, investment managers require greater safeguards against compliance breaches and better processes for efficient exception handling.
3. In an environment of limited technology budgets and narrow operating margins, how will investment managers grow their AUM while keeping operational complexity in check?

At this point in the market cycle, investors are once again turning towards active managers to generate alpha and help them navigate through the uncertainty. The disruption caused by the COVID-19 pandemic seems to have set the stage for this shift in investors’ approach.

While this produces a great opportunity for active managers, there is an increased focus on deploying an efficient technology stack across the entire investment management operation that will enable portfolio managers to capture alpha and consistently deliver value to investors.

Major challenges that investment managers face with their workflow include:

• Information fragmentation across disparate systems, such as separate portfolio management systems (PMS), order management systems (OMS), execution management systems (EMS) and risk management systems.
• Increasing regulatory and institutional investor pressures requiring pre-trade, intra-day, post-trade compliance checks.
• Access to real-time market information, such as news, prices and analytics.

Power of an IBOR

The Investment Book of Record (IBOR) as a concept has been around for many years.

Traditionally, it was viewed as a heavy duty back-office record keeping system that was typically updated only once at the beginning or end of each day.

Investment managers had to start relying on adding on separate portfolio, order and execution management systems to perform their trading, performance management and other intra-day activities. While the multiple applications helped to bridge gaps, the approach leads to inaccurate and/or incomplete data across these systems.

For optimal decision-making during market volatility, investment managers need a real-time view of their multi-asset portfolio holdings (positions, valuations, and cash balances), open orders (fills and rejects) and economics of the trade (commissions and brokerage).

This can be achieved with system consolidation that is powered by a centralized book of record.

The ideal IBOR of today offers real-time processing of the entire investment lifecycle through its cloud native architecture and eliminates the need for multiple systems — resulting in just one system to run end-to-end.

Delivered to the investment manager using a SaaS (Software as a Service) model ensures high processing speeds to power complex intra-day activities; high-availability with secure remote access ideal for a distributed working-from-home environment; and ensures on-demand scalability as the investment manager grows.

Further, it supports Financial Information Exchange (FIX) connectivity with custodians, fund admins and execution brokers to provide a real-time view of exposures, fills and balances.

In addition, the ideal IBOR serving as a centralized real-time ‘golden copy’ of the investment book enables the buy-side to perform basic accounting functions such as Net Asset Value (NAV) calculations, portfolio construction alongside benchmarking and ‘what-if’ scenario modeling, portfolio accounting and creating reports/extracts for both investors and regulators.

Compliance automation

The increasing regulatory demands and investor protection guidelines continue to put pressure on the buy-side in order to ensure greater transparency. New regulations designed to ensure stability and integrity in the financial system are affecting both the operational model and the bottom line of investment managers.

This is where an integrated IBOR with its complete and high-quality view of the investments proves to be a reliable platform. With the ability to support a diverse range of pre-trade, intra-day and post-trade compliance checks, the platform enables the investment managers to service a much wider spectrum of client profiles.

For example, between the placement and execution of the orders under any investment strategy, it is essential that custom checks and balances are in place to avoid any compliance breaches based on the pre-defined rules specified for each portfolio.

In addition to the custom compliance rule-creation capability, it is essential that the platform supports the entire exception handling workflow within the system and maintains an audit trail of each step along the way.

This empowers both investment manager and compliance officer to quickly identify compliance issues and deal with them in a timely manner. A robust compliance framework provides necessary assurance to institutional investors and can attract more business.

Data management

Data is not simply a buzzword.

If gathered correctly and interpreted accurately, it’s the path forward for trading. For investing and measuring execution quality, the evolution of analytics is just as critical as acquiring the data itself.

As the quantity and velocity of market data continues to grow alongside trading volumes and the number of tradable instruments, tolerance for errors and acceptable latency for delivering that data is dropping. More importantly, this data should flow through the entire system in a seamless manner.

Real-time data that is well integrated with the IBOR enhances the monitoring and visualization of the attribution and performance of the fund’s portfolio. It also enables investment managers to benchmark their fund’s performance with relevant market indices.

With more information available than ever, traders must find the right data, make sense of it, and ultimately act on it. Unstructured information, the explosion of alternative data, and the need for trusted sources makes an already daunting task even more complex.

Choosing the right technology partner

Today, hedge funds and asset managers must operate on ever-tighter budgets.

In many cases, they do not have the ability to support legacy, on-site technologies. Nonetheless, the buy-side is expected to perform basic shadow accounting functions such as Net Asset Value (NAV) calculations, reconcile trades with fund admins and prime brokers/custodians and create reports for investors and regulators.

Choosing the right technology partner that offers an integrated IBOR in a hosted environment will help investment managers demonstrate to institutional investors that the operational and investment solution in place is of institutional grade.

The partner should have a consultative approach, good understanding of regulations and a reputation of successfully delivering similar solutions to the market.

At Refinitiv, we remain focused on creating value for clients through data that spans the trading workflow, making it easier for investment professionals to see, analyse and act on insight and opportunity. We provide an integrated IBOR platform that supports the entire end-to-end workflow for the investment manager and allows them to focus on their core business.