Following the 2007-2008 global financial crisis, the regulatory focus has been on large banks. However, it is generally believed that it is only a matter of time that large investment management firms, which can be considered systematically important too, will face the same regulatory pressure.
Proactive asset managers who are anticipating these changes will not only be better prepared for this, but it will also give them a competitive advantage relative to their slower adopting peers. By leveraging for instance, the stress-test concepts from banks, an asset manager would improve its performance in these periods of market stress, regardless of regulation.
Against the backdrop of this anticipated change, it comes as no surprise that asset managers, now more than ever, require a completely accurate and timely view of portfolio transactions, positions, corporate actions and pricing to support investment and risk analysis.
This problem arises that, often, neither the Trading Book of Records (TBOR) nor an Account Book of Records (ABOR) can provide a fully consolidated, intra-day view. However, a centralised Investment Book of Records (IBOR) providing a ‘single version of the truth’ that captures a timely record of positions, valuations and exposures based upon all the investment data of a financial institution, can.
There are a few approaches that asset management firms can follow to create such an IBOR. One approach is to extend the TBOR. This requires the trading system to handle the full trade lifecycle, position history and security lifecycle and data management. This will most likely prove to be a challenge as the nimble trading data model needs to be extended, different data loaders and distribution tools to be created and management tools to be added.]
Alternatively, one could extend the ABOR capability. This would involve incorporating intra-day transaction cycle handling and pending order information, amongst other intra-day and ad hoc functions. But this could again prove difficult because intra-day workflows and real-time updating views based on flexible data input and output mechanisms require a fundamentally different design than the accounting centric, fixed batch driven design underpinning a typical ABOR.
The third approach, and arguably most preferable, is to establish an independent IBOR that is agnostic, yet ensures consistency with, TBOR and ABOR. When the integration is data-centric rather than based on specific (and eventually changing) workflows, it will ensure flexibility, and thus the capability, to meet future business needs. This IBOR could be built in house, or by using an existing vendor solution. It could provide benefits beyond just up-to-date views on positions, such as generating a golden copy data for risk, performance, TBOR and ABOR, and enabling reconciliations against custodians and ABOR.
A successful IBOR implementation will provide three key benefits: firstly, increased revenue by supporting better investment decisions based on timely and reliable data, secondly cost reductions as a result of increasing operational efficiencies, reducing data costs, and finally lower operational risks due to automated, transparent and governed processes.. As discussed, each method of implementation will have its own challenges, and not every approach will be achievable. For example, in the case of multiple front office systems (TBORs) or when accounting is outsourced, extending those BORs will not be feasible. Creating a new, dedicated IBOR from scratch does ultimately give flexibility to tailor the solution to a firms specific data and workflows, but could be costlier than buying an existing vendor solution.
Each approach has its pros and cons towards achieving the various IBOR benefits, but ranking and linking them to actual (required) investment data capability improvements determines the optimal approach to implementing a data-centric IBOR. Formulating a formal data strategy framework will also help to define the roadmap for implementing an IBOR. The framework should take into account not only the data architecture, but formalises why (benefits), who (governance), what (focus areas), when (roadmap) and finally, how (organisation & architecture), these benefits are achieved.
When this is defined correctly and executed accordingly it creates a true 360-degree view of timely and reliable investment, reference and price data will be available. Taking a data-centric approach ensures a more robust architecture in the long run.
Tim Versteeg is chief sales officer and general manager APAC (ex. China) at NeoXam