Leveraging data: front, middle and back
In the latest of our article series looking at the 2019 conference sub-themes, we discuss how the right approach to leveraging data is paramount to investment managers’ success
The margins and business models of buy and sell-side securities market participants have been eroded over the past decade. Outperformed by passive vehicles, active investment managers have responded by slashing costs and intensifying their search for alpha. Meanwhile, new regulations have eliminated certain revenue streams for banks and brokers, hiking the hurdle rates of others.
All players are searching for new ways to boost revenues and minimise costs. The ability to exchange data easily between systems, siloes and counterparties is critical to these efforts. Information is flowing seamlessly from the back office to the middle and front offices to generate new insights and opportunities for growth, as well as operational efficiencies.
We’ve always known information can provide an edge but today’s hyper-connected world has delivered a deluge, prompting an exponential increase in resources dedicated to validating, integrating and analysing data. A number of factors explain data’s paramount importance in the investment decision-making process.
First, the difficulty of delivering above-market returns in the era of quantitative easing has forced portfolio managers to look further and dig deeper to generate alpha, placing a premium on relevant data. Second, digital transformation of many economic sectors has yielded an almost infinite number of quantitative data sources, from heatmaps denoting transportation activity to near-real-time consumer spending data on precise locations and demographic groups. Third, financial institutions themselves now generate more useful data from investment implementation, partly due to more frequent and granular regulatory reporting, but also greater automation, for example in fixed income and swaps trading.
“Making astute use of data to support fundamental analysis can assist active asset managers in competing with passive vehicles. Data previously considered mainly of relevance to the back office can provide valuable input into assessments of market sentiment and liquidity, for example,” says Tim Lind, head of data services at US-based global post-trade services and market infrastructure provider.
Whether maximising returns or minimising costs, data is driving performance, suggests Lind. “The common thread is the ability to understand the characteristics of your assets from all angles. Anyone who remembers how certain markets froze up in the aftermath of the crisis can appreciate the importance of knowing whether you can liquidate a position.”
Performance, transparency, efficiency
“Events that cause large volume spikes, such as the reweighting of an MSCI index, can have unpredictable consequences for trading conditions, but with the right analytics it is possible to adjust accordingly.” - Ryan Cuthbertson, head of product management for custody and clearing, Standard Chartered.
Particularly in less-liquid markets, back-office data can augment front-office intelligence to help identify the other side of a trade, but its value is far broader, according to Richard Godfrey, global co-head of HSBC Securities Services. “Clients are looking for data and analytics that can improve the performance and transparency they can offer to their own clients, as well as to drive operational efficiencies,” he observes. “Clients want to know how their operational behaviours and processes compare with others in order to minimise wasted time and cost, for example by reducing manual involvement in reconciliation processes.”
Custodians are investing to get operational data to clients faster and make existing data sources more mobile, flexible and actionable. Standard Chartered, for example, is turning free form text into machine-readable data – examples include MT599 messages and faxed instructions – to reduce the cost, time and operational risk implications of manual processing. “This has had considerable impact for clients, but was relatively cheap and quick to develop,” notes Derren Selvarajah, global head of securities services technology and change management at Standard Chartered.
To further accelerate data, Standard Chartered has developed APIs that enable clients to track the live status of settlement activity as well as real-time cash and holding positions. The benefits of automating these standard queries are two-fold: the client no longer wastes time chasing data and can make decisions based on accurate, timely information; the service provider is no longer answering routine questions and can add value instead through market advocacy activities or tackling exceptions.
Standard Chartered also monitors transaction data at its Malaysia-based Collective Intelligence & Command Centre, which provides early warning of potential risks through real-time oversight of transaction flows. The centre uses predictive analytics to identify deviation from normal patterns, caused by a cyber-attack or similar criminal activity, or to flag common causes of trade fails, such as the persistent inability of a client’s systems to adjust to a US public holiday. “Events that cause large volume spikes, such as the reweighting of an MSCI index, can have unpredictable consequences for trading conditions, but with the right analytics it is possible to adjust accordingly,” says Ryan Cuthbertson, head of product management for custody and clearing at Standard Chartered.
This leveraging of back-office data is part of a wider adoption of pro-active approaches to data consumption by investment managers that prioritises speed and flexibility. Allen Cohen, digital officer for asset servicing and head of global fund services at BNY Mellon, identifies a four-tier spectrum of preferences among buy-side firms as they refine their data management strategies.
While he notes growing demand for self-service options, he says service providers should be prepared to supply multiple channels. “We do see a gradual shift across the spectrum, but I don’t yet see a time when we’re no longer delivering via portals,” says Cohen.
First, there remains strong demand for information being provided by established portals, with clients monitoring transaction flows and valuations via customisable dashboards. Second, some investment managers prefer higher levels of customisation through enhanced, interactive reporting services that allow optionality on presentation. Third, an increasing number of investment managers wish to consume data on a self-service basis, using APIs to draw down specific data fields at prescribed intervals. This allows data to be easily imported and integrated from multiple external partners into internal models and platforms. Fourth, more advanced clients are looking to receive data from custodians and others in real time, with APIs providing direct system-to-system links.
The data gold rush is leading to new products but also new models and partnerships. BNY Mellon has developed a tool that enables investment management clients to trace a mutual fund’s net asset value in real time throughout the day, rather than providing a figure just before close. This earlier intelligence allows the manager the necessary time to liaise with intermediaries well ahead of end-of-day processing windows and / or make considered adjustments to positions, rather than acting in the sometimes hectic environment of the closing auction.
“There is an extremely strong need among investment managers to manage and leverage multiple data sets, including the ability to drop apps on top of that data to derive insights and improve processes.” - Allen Cohen, digital officer for asset servicing and head of global fund services at BNY Mellon.
Further, the company recently announced a deal that allows mutual clients to access BNY Mellon’s real-time trade data, asset prices and cash positions via BlackRock’s Aladdin risk analytics and portfolio management platform. The alliance highlights the value of back-office data being mobilised to support front- and middle-office decision-makers, but takes place against a bigger data management picture.
“There is an extremely strong need among investment managers to manage and leverage multiple data sets, including the ability to drop apps on top of that data to derive insights and improve processes,” says BNY Mellon’s Cohen. “As investment managers tap into an ever-wide range of data sources, their supporting architecture will need to be sufficiently open and flexible to handle inputs from multiple third parties.”
While a greater appreciation of the value of post-trade data is binding front, middle and back offices together more tightly, DTCC’s Lind says new opportunities for agility and efficiency will emerge. “APIs and cloud are making technology integration simpler and thus making it much easier for asset managers to delegate tasks to multiple service providers. This shift from a bilateral to multilateral operating model can be achieved through API standardisation, but there is an opportunity for managers to outsource more supporting processes, concentrating their efforts on asset gathering, portfolio construction and trade execution,” says Lind.
“Depositary banks have adapted to the greater standardisation triggered by the new regulations, but manual processes are standing in the way of efficiency.” - Jean Devambez, global head of digital and acceleration at BNP Paribas Securities Services.
Data is also central to addressing the regulatory and business challenges facing the sell-side. BNP Paribas is partnering with Fortia Financial Solutions to eliminate manually-intensive compliance processes at depositary banks. Partly as a result of standardising regulations such as AIFMD and UCITS V, depository banks have engaged large teams to analyse pages of documentation and highlight rules manually, taking days to produce fund control plans.
“Fund compliance, notably in the private equity and real estate sector, can generate a lot of paperwork. Depositary banks have adapted to the greater standardisation triggered by the new regulations, but manual processes are standing in the way of efficiency,” says Jean Devambez, global head of digital and acceleration at BNP Paribas Securities Services.
Now, much of this repetitive work can be replaced by a jointly-developed solution that uses natural language processing capabilities to sift regulatory data from multiple sources, extract rules from fund prospectuses and monitor compliance against local and international rules automatically. Its parsing algorithms analyse fund prospectuses in several languages in seconds. Fund control plans can be produced at the click of a button, giving banks a real-time view of all funds under supervision, boosting control efficiency considerably.
“We’re still in the early days. We can expand to a wider range of documents and digitise many existing manual workflows. In addition, we have supported Fortia to develop the platform further and bring it to the standard needed to fulfil client expectations, and sell it to other banks and their underlying clients,” says Devambez.
Elsewhere, data-driven solutions require a shift from the sell-side’s traditional modus operandi. Banks and brokers have already revamped capital structures and risk models to meet guidelines introduced by the Basel Committee for Banking Supervision. To minimise market risk capital charges under the committee’s Fundamental Review of the Trading Book, enforceable from 2022, banks and brokers have to collaborate even more closely. If they are prepared to pool pricing data, market infrastructure providers such as DTCC can then provide market-wide data to help sell-side institutions achieve risk factor modellability in less-liquid asset classes, thus reducing capital charges.
“Back-office data can be an important tool in the middle and ultimately the front office. Further, it can provide value-added insights as well as help to measure process efficiencies,” says Lind.