The Long and Winding Road to IBOR Nirvana

Turn back the clock two years and everywhere you looked on the buy side, it seemed as though someone was doing something relating to the investment book of record (IBOR). IBOR really was the most talked about technology and operational phenomenon across the buy side since the days that order management systems hogged the spotlight in the early naughties. Then, almost as quickly as the IBOR trend materialized, it disappeared again, replaced by blockchain and distributed-ledger technologies, advanced analytics tools and artificial intelligence, and, for the foreseeable future, pretty much everything to do with Mifid II.

But does that mean that buy-side firms have all their ducks in a row on the IBOR front and there are no more stones to turn over, or if they don’t, do they no longer feel the need to develop such a capability, which, when done properly, promises to deliver fresh, reliable, clean and accurate position, holdings and exposure data to front-office personnel, with the view to helping them manage the most critical aspect of their roles: making the most judicious investment decisions on behalf of their clients?

Victor Anderson speaks to Stephen Butcher, SimCorp’s managing director for the UK, Ireland and the Middle East, and learns that the IBOR drive, while somewhat less sensational now than it was a few years back, is still alive and well, and that such platforms are more pertinent to the investment management industry than ever.

WatersTechnology: How do buy-side firms make the business case for going through the considerable pain and committing large portions of their technology budgets when implementing the necessary technologies and workflows in order to produce reliable, transparent and accurate investment data for the front office?

Stephen Butcher, managing director UK, Ireland and Middle East, SimCorp: This isn’t a business case, it’s a business need. Traders and portfolio managers need access to their current positions, holdings and exposure, in order to do their jobs effectively. Relying on a daily file from a third party introduces a point of failure and too often firms can’t start their business with current positions until 09.00, 10.00 or even 11.00 that day. That delay is unacceptable.

Similarly, if you operate in an environment whereby multiple tactical solutions are stitched together over many years, data transference between those disparate systems decreases reliability. That’s the business case for having persistent data in the front office and why firms need an IBOR rather than a “flush and fill” solution.

Additionally, these multiple data sources and the consequential inconsistent analytics create unnecessary manual workflows and costs. If talented professionals spend more time reconciling data than analyzing and using it to support their investment decisions, there is a clear argument for firms to consolidate platforms onto fewer applications and fewer databases.

Finally, data needs to be current, accurate and complete to reflect global exposure. If it isn’t, then you have an increased likelihood of regulatory and mandate compliance breeches. This could result in both an investment loss and reputational damage, either with the client or with the regulator. These situations are not just specific to the front office either – compliance breaches occur in the back office too. Aviva’s £8 million fine in 2016 for breaches of Client Assets Sourcebook (Cass) rules, proves that the investment in solutions that provide accurate data and correct data management are vital to the business. In addition to this example, there are many instances of compliance breaches that occur in the front office.

WatersTechnology: Is it possible to make a demonstrable return on the significant time and capital investments necessary to be in such a position? In other words, can buy-side firms put a dollar and cents figure to the benefits such a platform provides to the business?

Butcher: Moving to fewer systems, lowers the cost of ownership significantly, through the reduction of interfaces, data hubs, hardware platforms and so on. One of the biggest costs eliminated is the testing expense associated with upgrades. Furthermore, fewer systems means that firms experience fewer instances of “version lock.” This is where you are unable to upgrade system A because it shares a database with system B, and that won’t run on the same version of B as system A.

Equally important is the reduction in vendor risk, associated with having so many moving parts. That’s a major concern for most CTOs.

Making the time and capital investment in an integrated system, also improves automation of reporting and processes, making business processes quicker and less reliant on manual workflows. Once implemented, SimCorp clients report they’ve reduced manual processes by as much as 80 percent. An increasingly automated process can have a significant impact in reducing errors, and at the same time transforming the middle office to an exceptional processing center.

A single platform for core processing delivers the best foundation across the investment lifecycle, eliminating data errors and increasing efficiency by enabling niche or bespoke tools to readily access the same dataset. This is what we believe to be the architecture firms should aim for when addressing operational change, and will deliver the operational agility required to meet new challenges and gain access to new opportunities in a continually tough market.

WatersTechnology: What are the tangible business benefits accruing to front-office personnel able to access reliable, transparent and accurate investment data? Typically, what money-management activities does this scenario enhance?

Butcher: Such a platform offers the front office intra-day data and real-time processing of cash management, elective corporate actions, and collateral management. The front office has a timely and accurate view of all exposures across the entire business, enabling personnel to better manage risk and compliance. With integration of performance and attribution, this analysis runs into the middle office, and is also available to portfolio managers within their portfolio management screen.

WatersTechnology: To what extent are buy-side firms currently making a play in this regard? Two years ago, the buy-side was buzzing with IBOR chatter, but that has since died down. Does that mean buy-side firms are no longer interested in such projects or is it a case of the hype being attracted elsewhere?   

Butcher: Last year we won a record number of new firms that had evaluated their current operating model and realized it wasn’t working. They needed to simplify their operations and that’s where we came in. Presently, there is a continued shift away from multiple systems that are or more likely were best-of-breed, towards a single, open core system that supports the shift to highly efficient processing of the mainstream business, while being open to and easily integrated with bespoke or niche solutions.

WatersTechnology: Typically, what are the challenges associated with developing an architecture where buy-side firms can produce and disseminate reliable, transparent and accurate investment data to the front office?

Butcher: Often, firms will make incremental fixes that can resurface, or in some cases, result in further problems later down the road. What these firms need to do is take a step back and look at the business rationale across the whole office, and deliver the tools that asset managers need, to reduce operational risk and compete successfully, rather than  just [implementing] one piece of that puzzle.

WatersTechnology: Is this just another technology project or do data governance and operational disciplines also play a role?

Butcher: Yes, without changing operating processes you won’t achieve the efficiency and improvement the systems that span front and middle offices (in the case of outsourced back offices) or front to back, are designed to deliver. In that scenario, the investment case is unlikely to be met. At the same time, data is absolutely key to the process – both feeding the correct data and having an effective data warehouse to extract that data from.

WatersTechnology: To what extent do legacy platforms/technologies hamstring buy-side firms in this regard, bearing in mind it is incredibly difficult for mature buy-side firms to wean themselves off mission-critical legacy platforms or “rip and replace” them so that a new platform can be bedded in?

Butcher: The multiple-system or best-of-breed technology landscape that many asset managers have found themselves in has created a challenging environment to automate many aspects of portfolio management, risk and compliance. If an asset manager is using one platform for fixed income, one for equities, possibly another for derivatives, and finally a fourth for its investment accounting, it should not be that surprising that manual intervention is needed. Each of these disparate systems uses a different database and probably a different price feed. Getting an accurate, holistic view becomes almost impossible and requires huge efforts to reconcile them all.

The situation may be even more difficult for asset managers on legacy systems. In a recent global survey by Adox Research, almost half of the asset managers surveyed were using order management systems that were at least ten years old. Outdated systems do not keep up with the rollout of new instruments, or a manager’s desire to enter a new market, which forces the manager to either abandon that strategy or take it outside of the system and proceed manually – facing increased operational risk.

WatersTechnology: What is SimCorp’s stance/strategy on this subject, and how does it propose to address the various challenges associated with developing such an architecture/workflow?

Butcher: The industry has adopted a multi-asset class model and clients expect firms to offer equity, fixed income, infrastructure, private equity or commodities to generate the returns they demand. This is not ten years down the line – it’s a reality now. The challenge for investment firms is establishing whether they have the technology to support these multi-asset class strategies.

To address the technology discrepancy between production today and what’s needed to meet these demands, SimCorp believes the best approach is a scalable and integrated solution across all aspects of the investment process, for these asset classes. Last year, we invested over $60 million in research and development (R&D), to protect our clients’ existing investments and to allow them to meet their future needs within this single solution.

WatersTechnology: How can technology vendors help in this regard, and how do you believe buy-side firms should go about selecting a partner for the journey? Needless to say this is anything but a trivial undertaking. Typically these projects are measured in multiples of years, which exposes buy-side firms to the risk of the market moving on once the platform has been delivered in a live, production environment.  

Butcher: Firms need to work with vendors that are not just looking to be a service provider, but are willing to work together in partnership to achieve the overall business objective. This is an important culture fit that is often overlooked in favor of more transient requirements.

Vendors must have a commitment to the firm’s needs, as well as an acute awareness of the market in which that firm operates. It is vital for firms to ascertain this and to distinguish the difference between a vendor that is solely dedicated to this space, and whose only revenue comes from servicing the asset management industry, from those that provide this service as a small part of a much wider portfolio.

There is also the matter of strategy and investment. A vendor with a clear long-term focus, over the next three to five years, say, is much better equipped not only to service the firm now, but also to safeguard them in the near future.

SimCorp delivers two software releases each year, which respond to both client and market requirements, and spends more than 20 percent of its total revenue on R&D. In an ever-changing environment with increasing data, regulatory and market changes, this dedication isn’t just nice to have – it’s essential.