Better tech investment needed to face asset management turmoil

By Emma Olsson | 27 January 2020

Facing a slew of industry complications, asset managers today are increasingly investing in tech to alleviate pain points – but comprehensive tech solutions are needed to ease complexity.

In 2014, PwC reported that 2020 would see the asset management industry, known for occupying a relatively low-tech infrastructure, embrace a tech-centric approach. And while tech adoption is up – a 2019 PwC survey showed that 57 percent of asset managers had incorporated a form of emerging technology –  its use cases remain sporadic and under-focused. In December, Boston Consulting Group (BCG) reported that only 20 to 30 percent of asset managers invested with “conviction” across a broach range of use cases.

The hurdles facing the industry are numerous, according to Mohammed Turki, head of product asset management and customer services at capital markets tech provider Murex.

“First is the pressure on margin, second, the numerous regulations over the last few years and ultimately, a lasting low rate environment,” he says.  

“Our platform aims to tackle these challenges through TCO reduction while helping our clients increase their market share through new products with a higher margin or proposing additional services to their investors.”

Integrated platforms like Murex’s MX.3 aim to help to reduce the complexity of the IT landscape plaguing the asset management industry. The firm ranked second in asset management software in bobsguide’s 2019 software rankings.

“It streamlines the investment process from portfolio modeling to pre-trade and post-trade compliance, to OMS, to Risk, to operations and accounting, therefore, removing a significant number of breaks and the burden of reconciliation across all stages,” says Turki.

Shifting regulatory landscape

An increasingly complicated regulatory landscape is causing new road bumps for asset managers. The Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for the Collective Investment in Transferable Securities IV Directive (UCITS IV) have tightened regulatory control in the EU post-2008 crisis. Meanwhile, the gradual rollback of the Dodd-Frank Act in the US creates an uncertain landscape for firms to adjust to. Globally, the move away from Libor presents a number of complex hurdles.

In a statement dated December 18, the Financial Stability Board (FSB) announced that asset managers would be subject to greater regulatory oversight as they move away from Libor. The phasing-out process in and of itself threatens to destabilise the market, so firms are encouraged to work with those in the know.

“Given the degree of risk arising from the continued reliance on Libor, regulated firms should expect increasing scrutiny of their transition efforts as the end of 2021 approaches,” said the report.

“Addressing Libor discontinuation, we have developed a comprehensive Libor transition solution that addresses challenges across business functions and geographies,” says Turki.

“We are working with leading industry associations and are a member of the ISDA Working Group. We also work with market practitioners and market data providers. Our team closely monitors market developments to ensure that our clients benefit from our leading solution: to trade, process and risk manage new RFR-linked instruments, manage new curves for pricing and valuation, to understand the impact of Libor cessation on their existing positions and processes and finally, we provide them with the tools to easily transition derivatives and securities positions from 2021 onwards.”

The Solvency II Directive presents another challenge for EU asset managers, requiring them to provide a written outsourcing contract typically in the form of an Investment Management Agreement (IMA). Asset management software can help with Solvency II reporting.

“For solvency, we support both the standard model and the internal model. For the standard formula, we propose pre-packaged reports for Solvency Capital Requirements (SCR) for equity, interest rate, currency, property and the spread risks, with a look through for funds to the underlying assets. For the internal model, we offer a full Scenario Generation Engine that helps to manage, generate and maintain all the scenarios required for solvency and, on the other side, a Risk engine which offers a full mark-to-market or mark-to-model evaluation or a sensitivity approach based on Taylor expansion,” says Turki.

Shrinking margins in a low interest rate environment

Regulations aside, perhaps the greatest blow to the asset management industry in recent years has been the shock of shrinking margins. According to BCG findings, the value of assets under management (AuM) fell by four percent worldwide in 2018, “marking the first significant year-over-year decline in AuM since the crisis year of 2008.”

BCG warned that managers will have “a hard time prospering” if they did not make changes to their technology usage. Investment management and distribution were flagged as areas especially ripe for tech innovation.

Meanwhile, a trend of low interest rates is placing a burden on long term investments.

“The current low-interest rate environment is hurting the long-term investment investors; companies are obliged by regulations to have a significant proportion of their assets under management invested in bonds,” says Turki.

“MX.3 offers an extensive catalogue of instruments to enable firms to diversify their investment across a variety of bonds such as MBS, ABS, Callable, Emerging Market Bonds or structured notes.”

Customer-centric approach

Apart from easing existing complications, another facet of a robust tech solution is to address raising customer expectations. These expectations may not be explicitly linked to issues specific to asset management; rather, they arise from the ubiquity of tech across financial services on a whole.

Market risk analytics is one area where software solutions have seen an increasingly customer-tailored approach. Murex placed third in market risk analytics, also with MX.3.

“The Murex Market Risk offer is designed to handle the full process of VaR and stress testing computations and analysis, leveraging these three components of scenario, risk and reporting engines, that are fully integrated in the platform,” says Turki.

“MX.3 is equipped with a dynamic reporting engine with pre-packaged analysis of the risk drivers at the enterprise level, monitoring by risk factors and a drill down of all market risk figures (P&L, VaR, Greeks, stress testing, back-testing) to the position or the trade level. On-demand reporting capability is also available to downstream reporting systems.

“Users are easily able adjust different settings like the confidence level, the weighting, the inclusion or exclusion of some factors or benchmarks with very good response time. This reporting engine applies to portfolios as well as benchmark data.”

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