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11 Reasons Why Investment Managers Are Demanding Consolidated Positions Data

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The current market turmoil and volatility has emphasized the necessity of being aware of details behind positions and transactions. An environment with increased risk has drawn attention to re-evaluating data management practices across positions, client/counterparty, and instrument reference data systems.

Positions data manifests a firm's investment strategy and demonstrates its performance. It also can reveal a firm's exposure and potential risk through a variety of aggregation techniques. Because of diversity across instruments, businesses and regional requirements, as well as corporate reorganizations, firms frequently have multiple transactions software and data solutions. It is a challenge for institutions to bring together the data repositories backing these solutions to get a "big picture view" of the firm's holdings, its risk, and its overall exposure. This big picture view also assists management make risk / reward tradeoffs.

This paper identifies some of the key market drivers that are forcing the investment community to adopt data management practices that enable aggregate position keeping across their organizations and how an enterprise data management strategy can help achieve this.

The Business Drivers

The creation of a single view of positions data is a topic that has received considerable attention in recent years. In a sector in which consolidation continues to feature prominently, many firms are forced to address the problems created by the disparate sets of data mergers and acquisitions bring. Furthermore, with the rapid growth in the breadth of instruments being traded and the current inability of many of the established systems to handle such data, firms are compelled to use short-term tactical solutions to address their immediate operational issues. This serves to further exacerbate the problems posed by multiple 'versions of the truth' of position data.

Many firms have already or are in the process of addressing these problems. Others are yet to fully appreciate the operational efficiencies that can be realized by tackling this problem head on. The results of a recent ISC industry survey of European Investment Management companies, commissioned by GoldenSource, identified the primary drivers for position consolidation which has led to many firms establishing business cases for the adoption of such initiatives. The eleven key business drivers identified as influencing consolidated position keeping can be summarized as follows:

There are a number of key drivers today that are influencing with a degree of urgency the search among the investment community in particular for aggregated position keeping across the industry.

1. Straight Through Processing

The need to transition to electronic trading and the drive for STP has seen many Asset Management companies implement integrated Order Management (OMS) and Trading systems. These systems often support a variety of front office functions within an organization: decision support, order management, compliance and the trading interface.

To function efficiently OMS applications require accurate and timely position data at the security level.

2. Compliance

With the acceptance in recent years that prevention is better than cure, there has been a much greater emphasis on pre-trade compliance. Despite this, most firms still engage in levels of post-trade compliance for certain types of limit checking. Many firms are using a comprehensive OMS system such as Charles River or Latent Zero that incorporate compliance functionality.

These OMS systems are often implemented for a single asset class (e.g. Fixed Income only) or for one or two of their offices (e.g. used in London but not in Asia). These OMS systems can only evaluate accounts/positions that reside in the system therefore organizations typically use the OMS for specific compliance checks and then consolidate all holdings into a single repository to analyze concentrations across all holdings.

3. Assets Under Management

Reporting the total market value of investments managed has proved to be a difficult task for a number of organizations. The creation of a consolidated view of positions, avoiding any double counting typically thrown up by pooled investments is regarded as a necessary first step that supports the calculation of AUM (Assets Under Management) which is essentially a reporting function. AUM reporting has received widespread attention in recent years partially due to the creation of ethical standards to which asset management companies should comply.

Due to the practice employed by some asset managers to charge management fees based on a percentage of AUM, it is understandable that this reporting requires both accuracy and transparency.

4. Performance and Attribution

Performance Measurement requires the sourcing of appropriate position data and is a common challenge. If performance data is used by other functions within an asset manager, it is important that a common source of position data is used. An example is client reporting (i.e. the performance figures must be calculated on the same position values that will show on the client report).

5. Risk

Risk Management is closely aligned to performance. In some Asset Managers they are handled by the same group while other organizations have performance and risk as separate groups. Calculation of risk characteristics is now a common process within Asset management companies (e.g. Value At Risk). For this there may also be a requirement to source and store data explaining the historic relationship between sectors, industries and asset classes (i.e. covariance data).

6. Cash Management

Cash Management throws up two main drivers for consolidated positions data. The first, cash inflows and outflows need to be passed to the front office to ensure the required investment/disinvestment occurs in a timely fashion.

This process supports management of subscriptions and redemptions of unitized funds, dividend and coupon income and any transitioning to/from the manager of client moneys. This can be a complex process with information potentially coming from different sources (e.g. outsourced back office, Internal Transitions Team, Fund Administrator) and at different times of the day.

The second area is the management of discrete cash funds which will typically seek to outperform a given index (e.g. 3-month Libor). These funds will typically invest in cash or near cash instruments (CDs, CP) with a tenure of up to 1 year. They may well look to arbitrage between cash and derivatives markets in order to boost returns (e.g. FRA/futures arbitrage).

7. Collateral Management

Baskets of assets are committed as collateral to back derivative positions. These may be individual securities, cash balances or groups of assets. These positions need to be maintained individually, but also as consolidated positions where a basket of assets is used as collateral.

This information is used in the front office and is typically fed into back office systems and relevant third parties. One aspect of collateral management is to ensure that held/pledged collateral is (or is not) included in fund valuations and is marked as unavailable for trading dependent upon any rehypothecation agreements entered into. Consolidated reporting is also required to support operational tasks and reconciliation v counterparties.

The temporary exchange of securities against collateral is a widely used, low-risk yield enhancement strategy. The costs of operating a comprehensive lending program are driving some firms to consider the outsourcing of this service.

8. Futures

Initial and variation margins need to be maintained v clearing brokers for futures contracts. Again this is primarily a reconciliation function that drives the need for consolidated positions - positions need to be aggregated to the level at which the reconciliation v the third party (or other internal system) holds positional data.

9. Fee Billing

Fee Billing is an area that is particularly important where the Asset Manager has large volumes of discrete clients, either institutional or private client. The process of updating and managing client data (names, addresses, contact points) along with details of the billing calculations themselves (fee rates on unitized products held, fee scales dependent upon fund size - either AUM or number of holdings- and periodicity of billing) has come in for scrutiny in the last few years. Many large fund managers have implemented specialised billing systems to automate the process. It is not unknown during these implementations for fund managers to discover clients which had been under-billed or not billed at all. Having all this billing data within one system or easily extracted and combined with other data into a data hub can provide accurate and timely management information and can be used to model the impact of shifts in variables impacting cashflows (e.g. fee rates, market index levels).

10. Client reporting

Many Asset Managers consider their Client reporting to be a significant differentiating factor to their competition. Asset Managers have various types of clients and often have different approaches to reporting to them. Highly graphically printed client reports are still the predominant model used within European Asset Management. The process of producing client reports tends to have many steps and review points (i.e. a series of processes linked into a workflow, culminating in a reporting pack being produced).

Collation of position data from around an Asset Management organization is one of the first and fundamental steps in the whole process. Unlike many of the processes within Asset Management, Client Reporting is focused on a significant point in time rather than the latest set of information. The typical points in time are month, quarter and year end. Accurate and complete information is a priority for Client reporting.

The depth and diversity of the customer base within an organization for positions data dictates that achieving accurate, consistent and accessible consolidated positions data must produce significant economies of scale for any asset manager, large or small. The longer this problem is left unresolved, the greater the cost and effort to address it.

11. Request for Proposal (RFP)

Asset Managers obtain the majority of their institutional, pension or insurance clients by responding to RFPs. An RFP typically needs to include analysis of the Asset Manager's existing funds. Although each RFP is unique, the majority of the information required is common across all of them.

The challenge for asset managers is to be able to 'slice and dice' information in a variety of ways to suit the demands of the RFP. Without a consolidated view of all of the investment management company's assets this is at best 'a challenge' for those involved in this sales process.

In some instances, where information is not available at a sufficiently granular level, questions cannot be answered accurately. To provide meaningful responses to RFPs 3 main data groups are required; Accounts and associated account structures, position values and performance returns at the security level and security attributes necessary to 'slice and dice' the information.

Do you Know Your Positions - And Understand Them?

The current market turmoil and volatility has emphasized the necessity of being aware of details behind positions and transactions. An environment with increased risk has drawn attention to reevaluating data management practices across positions, client/counterparty, and instrument reference data systems.

Firms are seeing value in connections across reference data components to arrive at the bigger picture affecting their exposures across the organization. In September 2007, GoldenSource commissioned the A-Team Group, a specialist research and publishing house to carry out an industry survey into the status connecting positions/holdings data with reference data. The findings show that57% of the participants in this study ranked business risk as the highest factor in building a business case for central data management.

Positions data manifests a firm's investment strategy and demonstrates its performance. It also can reveal a firm's exposure and potential risk through a variety of aggregation techniques. Because of diversity across instruments, businesses and regional requirements - as well as corporate reorganizations - firms frequently have multiple transactions software and data solutions. It is a challenge - yet essential - for institutions to bring together the data repositories backing these solutions to get a "big picture view" of the firm's holdings, its risk, and its overall exposure. This big picture view also assists management make risk/reward tradeoffs.

To get up-to-date information, firms are linking to central reference data hubs prior to aggregating across transactions systems. In the same survey 75% had already implemented these changes in data access of positions and transaction systems due to the growing complexity of their business.

Complexity and Diversity

The current environment encourages asset mangers to invest in complex instruments so that they can compete with more aggressive, unregulated hedge funds. But these, complex derivatives, electronic swaps, electronic messaging, and trading are challenging the fabric of today's trading environment, by requiring system enhancements to deal with volume and complexity of transactions. There is still much manual effort involved, where Over the Counter (OTC) derivatives have been introduced into previously automated processes, especially when record keeping was combined with regulatory compliance.

Previously, before complex instruments, firms could calculate valuation and measure exposure through the relatively straightforward operation of multiplying holdings by latest price - both of which were stored in their transaction and accounting systems. Now, the industry is beginning to see that examining positions' exposure, in particular when investments include derivatives and structured finance, requires more depth in data than traditionally kept in transaction management systems.

In the new world, "defining the holding" could require knowledge of its underlying instrument and related information like collateral - reference data held in a different data repository. So, to identify true exposure, firms need to link their transaction application systems data with data in other systems. Adding to the complexity, nominal values of contracts, like options, far outstrip actual investment exposure. It is extremely difficult to obtain, model, or derive prices of these contracts. Human interaction and judgments across systems may be necessary.

The result is that firms need to capture and validate the key factors related to their investments that contribute to exposure - e.g., holdings, underlying instrument, credit information, risk data, prices (actual and evaluations), mark-to market/mark-to-model, descriptive data, and other derived indicators. This process will help provide clear picture of performance, valuation, and risk; it takes access to and connections across, a spectrum of reference data elements.

Conclusion

It is a common misconception that the consolidation of positions data is a relatively simple process. Experience has shown this to be particularly challenging to all Investment Managers. Replacing a manual process with an automated and scalable solution is not without problems. When the manual process includes spreadsheet adjustments and undocumented local knowledge, the challenges can be acute. Regardless, this is a key building block of an Investment Manager's operation.

This is where an Enterprise Data Management (EDM) platform provides the ability to dynamically integrate data across the enterprise architecture and create centralized, consistent data sources. Applying EDM involves a significant sea change in approach to the management of an organization's IT infrastructure as well as data governance. The challenge remains to break down the silos in favour of an integrated data platform.

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