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Goldman Builds Toward Asset Class Convergence | Buy Side Bolsters Middle Office for Cross-Asset Trading |
Buy Side Bolsters Middle Office for Cross-Asset Trading
April 27, 2009
Fund managers are making adjustments in their middle and back offices to overcome operational obstacles created by cross-asset trading.
"Too often operations staffers have been caught flat-footed in changing legacy systems on the fly or relying on Excel spreadsheets," says Roger White, managing director of Citisoft, a buy-side consultancy in Boston. "Investment managers must standardize their procedures and find or build new systems with multi-asset-class capabilities."
As fund managers expand their investment strategies beyond vanilla equity and fixed-income instruments, nowhere is that need more pressing than in the middle office--the accounting, risk and reconciliation bridge between a firm's back-office clearance and settlement and its traders and portfolio managers. "The financial crisis has highlighted the importance of the middle office's role in data aggregation to ensure accurate measurement of current and future risk exposure," notes Guillaume Weeger, Asia-Pacific manager for San Francisco-based Calypso Technology, a trading and risk management software company.
Different accounting systems, for example, often come up with a range of valuations for the same instruments, particularly for complex mortgage- or asset-backed securities.
But using a data warehouse isn't necessarily the answer, according to Pendo Systems president and CEO Pamela Pecs Cytron. "If transaction information is not stored correctly, errors in downstream reconciliation and valuation will occur between fund managers and their custodian banks, prime brokers and broker-dealers," she says.
Newark, N.J.-based Pendo offers BasisPoint, software that takes information from firms' order management systems (OMS), breaks it down at the tax-lot level and stores the details in a transactional database. The platform, which also allows clients to automatically unwind positions and rebook them electronically, has 17 fund manager and insurance company customers.
Last year, custodian Northern Trust Corp. began using BasisPoint as part of a new investment accounting outsourcing business for insurance companies, which need to manage their general accounts. "Insurance firms and pension funds are alike in investing in multiple asset classes," explains Peter Cherecwich, COO of Chicago-based Northern Trust's asset servicing unit. "The key difference is that insurance firms must also follow not only generally accepted accounting principles but statutory ones."
AIS Fund Administration, which has $15 billion in assets under administration, uses ShadowSuite from Shadow Financial Systems Corp. to book trades, do tax-lot accounting and perform attribution assessments across a range of securities, including mortgage-backed instruments, bank debt and over-the-counter derivatives.
Boris Tiomkin, CEO of Hackensack, N.J.-based AIS, says the Shadow software provides more functionality than the typical portfolio reporting platform, including a double book-entry general ledger package and a fully integrated general ledger that "allows users to view the origin of any transaction to verify its accuracy and report, compare and analyze key information."
Because ShadoSuite uses an Oracle Corp. relational database, AIS was able to develop 160 specialized performance measurement and valuation reports that are sent out in real time rather than at the end of the day. Where it used to rely on dealer quotes obtained over the phone, AIS has automated the pricing of OTC derivatives through financial models developed by analytics firm FinCAD, which are incorporated into the Shadow software.
In-House Technology
While firms like Northern Trust and AIS have turned to outsourcing providers, others are opting for in-house resources and seeking to consolidate software to achieve straight-through processing and eliminate breaks in their middle-office operations.
