The benefits of upgraded Investment Book of Record technology

By Monica Unjia | 4 September 2017

Traditional IT architecture involves segregated front-office and operational systems. Furthermore these systems can be specific to individual asset classes; equities, fixed income, derivatives and structured products. Products are increasing in complexity, and tighter regulations are requiring portfolio managers to take a consolidated view of their portfolio holdings. Taking a consolidated view is proving more difficult with the increasing blurred lines of an ‘overnight’ position. This is a result of increasingly accessible global markets, in addition to the speed and agility of trading.

The consequence of these changes is a strain on legacy systems has become more apparent. Therefore, to continue growing with your AUM these issues require focus, and a degree of evolution.

Legacy trading book

Historically, the legacy trading book of records begins with a clean slate each morning, with a Start of Day (SoD) figure provided by operational staff to the front office. The SoD is the output from the back-office accounting systems, which process the previous End of Day (EoD) figure with all t-1 trades overnight.

From the SoD, the portfolio manager will progressively update the trade blotter, with manual adjustments of intra-day trades via an OMS. The manager is therefore blind to a true intraday position due to the absence of real-time cash positions, corporate actions, subscriptions/redemptions; where these are manually adjusted in the back-office systems.

The front and back-office systems are therefore only in sync at the start and end of the day; this will disadvantage a portfolio heavily trading in equities or derivative securities due to their cash sensitivity. The front office essentially bears an operational cost as time and efforts are spent dealing with manual inputs and reconciliations.

Investment Book of Record

An Investment Book of Record (IBOR) allows a portfolio manager to execute more informed investment activities. Intraday activities are enhanced with accurate positional information on which investment decisions are executed at any time. The manager gains a clear and singular view of their portfolio, with the access to real-time aggregated data, whilst avoiding the inefficiencies of trading on a SoD figure and interval updates. As a portfolio manager, you have the advantage of managing your portfolio with all the available information applied rather than having to manage your data.

The IBOR is an independent and fully integrated system developed to support the entire trade lifecycle for any asset class. Programmed to process all tasks related to the investment process, the IBOR is reactive to changes and updates as they occur. The front and back-office are now consistently in sync.

Your middle-office and operational staff will benefit from a migration from legacy to IBOR and this with streamlined tasks on a single system - the pains of ‘agreeing a final figure’ will be a dreaded obstacle of the past. A consolidated positional view enhances the portfolio management, risk management, trade management and regulatory reporting simultaneously for multiple users.

What is your definition?

Defining your IBOR can be a daunting task - this involves the creation of a brand new software infrastructure, a system designed to meet the requirements of all front to back users and ensuring it supports compliance and regulatory reporting. Understanding a portfolio manager’s drive to achieve alpha and their determination to maintain their competitive advantage is key for a vendor in creating a clear definition of an IBOR to best suit its client’s strategies. The portfolio management system is central to an asset manager’s core process and is independent of back-office accounting systems & third-party reporting.

How does the portfolio manager win?

When defining your Investment Book of Records, ensure your new system can connect to an external market data provider. This key is to equip the portfolio manager with instantaneous knowledge of stock and cash positions as the trade is executed. Delay and reliance on admin confirmation or custodian inventory can be mitigated and the manager’s efficiency is magnified. A manager gains access to accurately forecasting all cash positions at any given time in the future; subscriptions/redemptions, corporate actions, bond maturities, forwards & futures expirations, are all part of the equation.

The optimal approach is:

a) Accurate forecasting relies not only on projected figures but also on accurate past data

b) Front office view should be separate from the middle office view

A seamless connection to your third-party service providers will ensure your operational activities are based on real-time data, eliminating the use of manual adjustments. Finally, don’t forget the importance of establishing user access rights, to segregate the multiple activities occurring throughout the trade life cycle. Proactively identifying and mitigating the risk of trade manipulation is key for this system’s risk approval. e.g. a trader has restricted access to post-execution intervention.