The case for the investment book of record
It is essential for investment decisions to be based on accurate and complete information, but obtaining that in the form of an investment book of record is easier for some asset managers than others, according to John Mayr
Given the surfeit of data that bombards us, it might be reasonable to suppose that any portfolio manager in any investment management organisation has complete and accurate positional information on which to base investment decisions at any time. This is not so.
There was a time, though, when this was not necessarily problematic. Every morning, portfolio managers would start with a set of position records, refreshed by accounting systems overnight. This would be adjusted during the business day to reflect trading activities as they took place, creating a trading book of record (TBOR).
Although important elements, such as an accurate cash position or corporate actions, were often missing, the TBOR provided an acceptable view of positions on which to base investment decisions.
But the world has moved on. The trend towards globalisation has introduced operational dependencies that make debatable the very concept of an ‘overnight’ position. A wider range of investable securities and strategies has made the understanding of cross-asset views essential. Regulation has made collateral management a required element in investment decision making. And the need to have a holistic view of risks associated with any action, or inaction, is critical. So, as well as executed trades and corporate actions, the portfolio manager needs to factor in resets, simulations, open trades, benchmarks, collateral needs, cash, and so on, to have a complete picture. A TBOR is today increasingly considered simply inadequate.
Yet, depending upon the technology at any given firm, pulling required information together into an instant, accurate and complete view for investment decision making – into an investment book of record (IBOR) – can be a huge challenge. Some asset managers are much better placed than others to do this, however, and this very much depends upon their operating models.
Asset managers’ operating models comprise business and technological components. They cover systems and human processes to support all the functions that must be accomplished to remain in business and to support business strategy. These include all front, middle and back-office activities. However the degree of coherence between these components varies greatly between organisations.
For example, a firm may have a system to support active management of equities, but another for fixed income and others for OTCs, exchange-traded derivatives, alternatives, currencies and structured products. Some business functions may be outsourced. The resulting fragmentation of business data, an inevitable outcome of such an operating model, will undermine this firm’s ability to know comprehensively or consistently its investment positions at any given instant across the organisation. The data is in the wrong place to allow this to happen readily. Where operations are outsourced, the data will often not even be in the business that needs it until the next day.
This is just one example, but variations will be familiar to most people who have had exposure to investment management organisations and their operational mechanisms. Indeed, the example is arguably over-simplified, as many firms will operate with dozens or hundreds of disparate systems and processes. The more complex the environment, generally the greater will be the problem of establishing a true IBOR.
So what can be done? Clearly the answer depends heavily on the current state of the operating model. Here, every business is unique, but to take the earlier example, one option would be to build out the functionality of the front-office systems to incorporate the additional information the organisation does not hold – the problem manifests itself in the front-office, after all. But how realistic a solution is this?
Effectively, functionality is required that supports the full life cycle of all asset classes. This is generally thought of as investment accounting system territory, however. Incorporating it into front-office systems not designed from the outset to handle it is likely to be a daunting proposition.
What about extending accounting systems to support IBOR requirements? Much will depend here on the state of those systems and indeed their location. If, as is too frequently the case, there is a legacy system – broadly one based on old technology, infrequently upgraded or no longer actively sold or supported – adapting it to handle newer instruments and processes is unlikely to be practical. If the business operation and associated systems are outsourced then the issue is yet more complicated, of course, as control lies with a third party.
The logical solution would appear to be to establish an IBOR as an independent, fully-plumbed-in, central element of operational architecture. A caveat here: it may be tempting to look at an IBOR as simply a data repository and so to look to a data management or data warehouse system to provide the needed consolidation. However, this approach overlooks key aspects of an IBOR, which must do much more than offer just improved business data quality and delivery. The IBOR needs to be a processing engine capable of reflecting essentially every type of business-related event in the investment process and be sensitive to such changes as they occur, no matter their source.
Furthermore, while the IBOR needs to provide the basis for multiple, dynamic views of positions for front-office professionals and others, there must be no risk of discrepancies between those views. The organisation must be able to base investment activities around a single, accurate, consistent version of the truth.
Establishing an IBOR like this is clearly a large and complex undertaking, justification for which naturally will compete with other priorities. However, some firms have already used this approach.
As mentioned earlier, however, certain asset managers are much better placed than others in respect of a true IBOR by virtue of their chosen operating model. These managers have made it their strategy to utilise, as far as possible, a single core system, with a single central database at its heart, as the basis for operational support across the business from front to back office. For them, the IBOR conundrum is already a long way to being solved. With such a fully integrated solution the capability to understand investment positions is demonstrably superior and markedly simpler to achieve.
First, inherent in such a design is a single, accurate version of the truth – a single position. Second, as a core front-to-back processing engine, there is already natural integration with all aspects of the investment process on an event-driven basis. Third, the database provides the basis for the multiple, configurable, yet completely consistent views needed by different professionals across the business. There is much work to be done on the business’s specific requirements of course, but the basis is there.
So there are alternative approaches to evaluate, depending upon the current and desired future state of the firm’s operations. One thing is obvious, though – the effect of failing to address the problem is that investment decisions can be made only on information that is incomplete, inaccurate or both. That means unexpected, uncontrolled outcomes. That is not what regulators, investors or any other stakeholders expect.
John Mayr is head of marketing at SimCorp