The Drive to Scalability in Data Management
What is driving this?
Strategic Thinking and Planning - Strategic initiatives are being instigated by IT departments, however most of these initiatives are being driven by the business. For many years the business has had to support multiple similar initiatives with scarce resources with the consequence being the business is forcing prioritisation and more strategic thinking.
Increaing Regulation - A number of different regulatory/compliance initiatives are currently underway (e.g. MiFID, CRD, SOX etc.).
Consistency - Managers are insisting that all parts of their organisation use consistent values and classification schemes (e.g. common definition of FI and Cash). Consequentially operational units are under increasing pressure to respond. Disparate parts of organisations are working together for the first time in attempts to report values to management that are comparable.
Reconciliations - Each use of position values around an organisation typically necessitates adjustments and reconciliation. Reconciliation of positions is often a difficult and time consuming process. Organisations are trying to reduce the number of reconciliations performed.
Derivatives - Trading and the associated processing of derivatives is the most predominant issue being tackled by buy-side firms. Exchange traded derivatives are already widely used, OTC derivatives continue to become a more prominent part in Investment Managers thinking as they search for alpha in a world of low interest rates and low returns. Volumes of CFD’s and CDS’s in particular have exploded within European Asset Managers. Derivatives bring many issues with them and organisations have tended to take a tactical approach. Underlying data for these instruments creates requirements to source, store and disseminate data not currently held in the organisation to enable securities to be created, traded, confirmed and settled. Although electronic confirmation and settlement utilities are now available, many asset managers are still performing these tasks manually. Many of the key systems employed by Investment Managers are designed to deal with the “old world” of long only investment and cannot cope with such concepts as short positions or transactions where there are two legs (swaps). Many organisations struggle to accurately value their derivative positions. As a result, a plethora of tactical processes and workflows have in many cases been built. As volumes of these instruments build and the complexity of the instruments and trading strategies for which they are employed proliferate, the processes soon meet volume, resource and systems constraints.
How are Investment Managers reacting?
Our survey questioned the whole range of Investment Managers from large to small and from service provider to boutique hedge fund.
Many tier 1 firms historically adopted a rather cavalier and non strategic approach to system selection and implementation. In some cases, the business became frustrated at the lack of support provided by IT and took matters into their own hands. The results can still be seen in many firms; a large legacy of stand-alone or point solutions with complex and inefficient mechanisms put in place to attempt a semblance of inter-system co-existance.
Happily most tier 1 firms are now more strategic in outlook. The legacy of the past is still in evidence however, making these firms cumbersome and slow to embrace change. This difficulty in moving quickly can lead to the temporary abandonment of strategic aspirations in favour of tactical solutions to hit aggressive targets demanded by the business. A clear example of this is the rapid growth in derivative trading: Many of the systems employed across the organisation are unable to cope with these instruments. Unable to implement strategic solutions rapidly enough to support business demand has led to a flurry of tactical solutions as a stopgap measure.
Tier 2 firms are not as strategic in their approach to IT. This coupled with a smaller footprint of legacy systems makes the typical tier 2 firm less cumbersome and more “fleet of foot” than many of the major players. The greater emphasis placed on value for money solutions has resulted in a greater appetite for outsourcing in this sector.
Tier 3 firms do not generally consider IT as sufficiently important to their business to warrant the formulation of strategies. Professional IT resources are generally scarce in such companies. This paucity of skills and the general lack of investment in IT has lead many of these firms to consider outsourcing. Tier 3 firms are keen to use Application Service Providers to remove the burden of internally managed applications or infrastructure with insufficient or unskilled resources, they also lean heavily on their custodians to provide functionality – e.g. asset servicing.
The use of spreadsheets is still widespread in all tiers of asset management companies, however it is not uncommon to find the use of spreadsheets in tier 3 organisations in critical areas such as trading.
Third Party Administrators (TPAs) cited a growth in derivatives as a major area of focus. However, when one considers that TPAs are only interested in a sub-set of the functionality normally undertaken by asset managers, it is not surprising that they are more advanced in dealing with derivatives than most.
TPAs by their very nature experience a unique set of problems. In order to make their business model work, a TPA will need to migrate multiple clients onto a single common platform to realise the desired economies of scale.
True scalability is therefore a primary concern as is certain functionality made necessary with multiple clients on a single platform e.g. multiple reference data golden copies.
Where do Investment Managers feel the pain with positions data?
All respondents in the main work with end of day data. Some did reveal that they are starting to build cases for the introduction of real-time data although this is still at an early stage.
All respondents again cited the growing use of derivates and the lack of support for such instruments in installed applications are the primary area of concern.
In some instances, firms have been forced to implement multiple solutions (eg trading systems) to provide a short term solution to this problem. In others, the administration of hedge funds has been outsourced to a third parties or it has been accepted that highly manual processes are required.
All respondents work with end of day/snapshot data.
In order to attract business, TPAs seek to offer enhanced capabilities in certain key areas. All the respondents saw their ability to accommodate derivates as a key differentiator. One firm was intent on establishing a world class market leading asset servicing capability.
The survey yielded inconclusive results for tier 3 managers with no clear consensus on the areas receiving most attention at present.