While IT budgets at buy-side firms have not fully recovered from the cutbacks of the Great Recession, front-office demands keep growing in quantity, complexity and required speed of response.
The impacts that front-office needs are having on the IT and operations decisions made by buy-side firms are far-reaching.
As a result, investment managers must accept and embrace the growing role of front-office demands in driving back-office replacements. This includes evaluating an over-reliance on legacy investment management systems to drive enterprise-wide success.
Front-office developments like new asset allocation products, changes to risk management and the increased use of alternative investment strategies all pose tremendous challenges to back-office IT.
New asset allocation products, volatility strategies and lifecycle funds introduce new data requirements like the need to create custom benchmarks. The changing risk management practices of the buy-side also impose increased demands on IT. Beyond that, the derivatives strategies that portfolio managers are implementing with increasing regularity present challenges that require changes in back-office technology and operations.
As an example, a recent SimCorp poll of nearly 135 executives from 84 North American-based buy-side firms revealed continued failures in derivatives processing. A concerning number of respondents still rely on legacy systems even as they seek to generate alpha through alternative investment strategies. When asked if their firms need to create workarounds to support derivatives in current middle-and back-office operations, 82% of respondents said yes. Additionally, over one-third admitted that the accuracy of client reports is compromised due to the need for extensive workarounds.
The data shows that legacy systems hamper new product time-to-market and compromise competitive advantage. Fifty-three percent of respondents revealed that their systems require at least two months to model and launch new derivatives products, and sometimes significantly more. For 22% of their firms, this takes a minimum of four months. Only 24% can roll out a new offering within one month, while 4% are entirely unable to launch new products using their current systems.
The risks associated with legacy technology platforms are real. Demands for alternative assets and innovative products are outpacing the technology platforms that are currently utilized in most investment management firms. Buy-side firms must transition from legacy platforms to state-of-the-art systems that broaden their asset coverage capabilities, especially in derivatives, and enable user control for queries, data access and reporting. Additionally, CTOs are wise to consider front-office needs as critical drivers not only for internal IT success and meeting the goals of the business, but also for their own career advancement.
Data Management as a Strategic Asset
Investment managers must treat data as a strategic asset. Reference data and market data management are significant concerns for the buy-side given the influence data can have on alpha generation, valuation and regulatory compliance. Consolidating positions and exposures across asset classes, customers and counterparties is critical to delivering the enterprise-wide view that is required to reduce risks and comply with new regulatory demands.
Leading asset managers are being more selective about which data is critical. Firms must select data management platforms flexible enough to cope with new asset classes, or data types, to reduce risk and meet regulatory requirements.
Addressing Regulatory Pressure
Even after years of fretting over new regulations and investing in regulatory IT, nearly half of firms' regulatory spend has yet to be incurred. Whether it is FATCA, Dodd-Frank or EMIR, the regulation that governs OTC derivatives in Europe, regulatory pressure is driving industry participants to rethink activities like client and regulatory reporting.
Smart CTOs are now increasingly show-casing the connections between IT priorities and regulatory projects to win CFO buy-in. They are also using regulation as a driver to force automation of manual processes and replace homegrown applications with innovative systems.
Selecting the right vendor for a core investment management platform is critical to supporting front-office needs, and firms are well-served to consider such vendors as true partners. The right solution centralizes processes and data, complies with new OTC derivatives regulation and supports growth in assets under management.
Regulatory pressure and the growing use of new strategies and asset classes, including derivatives, should have buy-side firms rethinking current investment management platforms. Given the system deficiencies that were exposed during the financial crisis, the number of buy-side firms still attempting to process derivatives on disparate legacy systems is troubling. Manual processing and costly errors hinder vital business growth. Replacing a legacy system with a state-of-the-art platform allows firms to support front-office needs, meet new regulatory and reporting demands and create efficiencies in the back-office that deliver benefits across the organization, and ultimately drive portfolio performance.
David Kubersky is managing director of SimCorp North America.