Firms are discovering there is a strong business need for accurate real-time positional data across their organizations. Access to such data would maximize investment opportunities and ensure that a firm can be fully invested. For some, an Investment Book of Records (IBOR) addresses that need. Gaining considerable attention in the investment management industry, particularly within more retail-focused firms, an IBOR provides real-time portfolio visibility through the synchronization of front and back-office systems and can be implemented in a variety of ways.
Traditionally, an investment manager has a front-office system covering a portfolio management system (PMS), an order management system (OMS) and possibly an execution management system (EMS), partnered with a back-office accounting system. Linking and integrating these systems is typically performed by various extraction solutions. Historically, these were custom solutions but today the trend is toward off-the-shelf data management solutions.
Each morning, the back-office system produces the current positions for the start of day. These are then passed to the front-office PMS/OMS. Throughout the day, trades are executed within the OMS, and at the end of the day, a trade file is extracted from the OMS and sent through to the accounting system for processing.
Corporate actions, subscriptions, redemptions, and general cash movements are manually adjusted and entered into front-office systems or into back-office systems by an operations team. As a result, the front office and back office would only be in synch at the start and end of the day. The rest of the time, they are running their own separate processes and do not have a consolidated picture in time of position, including cash across portfolios.
Traders Need Data
Consolidating the front office and back office into a synchronized real-time system requires considerable time, expense and effort, and doing so may deliver the business benefits that will make it worthwhile for all organizations. Investment managers who have high volumes of subscriptions and redemptions, large equity portfolios or fixed income funds with the associated derivative instrument mix will have heavy cash flow-sensitive instruments. They must bear the operational cost of manually updating and synchronizing along with the missed opportunity of cost being fully invested or missing a market opportunity because their portfolio managers must spend time performing administrative tasks. For these firms, the traditional approach requires too much time and effort to update and synchronize.
Firms must now function as a unified organization with a single view of the world, able to react to changes in each market with speed and agility.
To do this, investment firms and their traders need data – and not just data in various systems and databases. Instead, firms need a single source of accurate, timely, and clean data that can be used throughout the organization as the truth. Those with access to this data and the ability to use it to gain a competitive advantage will be most successful.
The IBOR Options
As with any trading challenges, there are a variety of possible solutions. Each has its strengths and weaknesses. The one to choose, however, is the solution that best fits into the existing ecosystem and solves the associated business problems better than any other option.
Single System from Front to Back: The key point for an IBOR is to have all information in a single location. Therefore, the obvious solution is to utilize a system that handles front-office PMS/OMS/EMS duties, as well as the back-office settlement, accounting and NAV creation.
Using a single system ensures that all corporate action changes, cash adjustments and amendments, subscriptions, redemptions and reconciliations happen within a single system or database. This system acts as the golden copy for all operations, trading and portfolio management. For many firms, a complete out-of-the-box single stop system is a compelling solution.
While a single solution sounds appealing and straightforward, there are challenges to this approach that should be considered. First, by selecting a single system, firms are inherently tied to one vendor, with that vendors product roadmap, features list and strategy. Second, the simple technical concerns of scalability and reliability can be mitigated to a certain extent with careful technical planning, but there is always a risk of this with a single system layout. Third, the systems may not have all of the necessary functionally. Fourth, if a firms portfolio managers and traders are attached to their current workflows, they may find the capability and functionality of such a system difficult to adopt.
Enterprise Service Bus: An enterprise service bus (ESB) is a centralized architecture solution for synchronizing many systems within a firms ecosystem, connecting all systems at a single point. This results in all systems having the same information at the same time. As a solution pattern, an ESB is very scalable, and it also enables rapid implementation.
An ESB sounds like a compelling solution, but it too is not without challenges. It is a companywide initiative that takes resources from all areas and requires niche technical skills to implement. Complex implementations can last for many months and there is limited visibility into the actual business value that an ESB delivers.
Where an ESB really excels, however, is its ability to link together multiple dissimilar systems that are globally distributed. If a firm needs to verify what was traded on its portfolio in London and what its traders are trading on in New York, then an ESB might be a good solution.
Centralized Data Warehouse: The most commonly used design pattern to solve data consolidation issues within the investment management industry is the data warehouse.
A data warehouse is a solid concept. They are mature, reliable and scalable, with a number of vendors and resources that can design, deliver and support their use. A well-designed and accessible data warehouse can be the bedrock of an organization supporting not just the PMS/OMS/EMS front-office world, but also making available trading trends, cost of trade and a whole gamut of useful operational statistics to analyze various costs within an organization.
From a business perspective, there are benefits to a data warehouse. It uses mature, low-risk technology to deliver a single location for investment positions. However, when timely updates of the positions into the system are needed, the centralized location does not allow for quick reaction times.
Distributed Data Fabric: Data fabrics are common in the sell side, but are rarely seen within the buy side. As a transactional data fabric, the operation can be likened to a data warehouse without the data warehouses weaknesses. Ultimately, the view is like a database in a single location, but in near real-time operation on a distributed grid. Data fabrics are gaining a great deal of traction as a sell-side risk solution and are well suited to buy-side IBOR challenges.
Data fabrics are cutting-edge technology for enabling an IBOR. As such, there is the inherent implementation risk of finding quality resources able to design and deliver an optimized solution that provides the needed operational value. They require deep knowledge within a technical niche area, so resources are more expensive to find and projects are more complex to plan.
Off-the-shelf Software: As with all technical problems, some investment firms prefer off-the-shelf software that will solve the problem quickly and easily, thus reducing the project and operational risks involved with change. Because this is a new market, some of the leading software vendors have not yet developed solutions to this problem.
The Truth Will Out
While the concept of an IBOR has existed for some time, the maturing investment management market, coupled with the need to use the latest tools and information to adhere to mandates in this space, has now made IBOR an issue that needs to be addressed. Ultimately, the key factors in choosing a solution involve the market a firm operates in, the impact that a lack of an IBOR is having on the business and the speed in which a firm wishes to gain a competitive advantage in the market. In the end, the most successful firms will be those that strategically align their choice of solution with their business objectives for growth.
Duncan Cooper is a director with Sapient Global Markets and has worked within the financial services arena for more than 20 years. For the past 15 years, he has specialized in investment and wealth management.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community. Please send your comments to Traderseditorial@sourcemedia.com
