“You could be a meteorologist all your life and never see something like this. It would be... the perfect storm.” So goes a classic line in one of the few great Hollywood fishing epics. The Perfect Storm finds fisherman George Clooney and his shipmates venturing out into dangerous waters and being trapped between two momentous and powerful storm fronts. Asset managers may well empathise.
On one front, ever more powerful regulation is blowing in, growing as it does. This regulation comes with ever-increasing demands for transparency around liquidity and capital requirements. Frameworks such as UCITS III also require liquidity reporting to be done on a more frequent basis. Not just that, but institutions will now have to demonstrate data quality and the provenance of data used to derive calculations – with regulations such as Solvency II coming into force in late 2012. Finally, you have central banking authorities within each country defining specific domestic reporting requirements.
Meanwhile, sweeping in on the other front comes ever increasing volumes of OTC derivatives trades – with many segments of the market continuing to expand despite stricter regulation. This is great news for those fishing for a big profit, with these complex and specific instruments potentially very lucrative. But OTC trades are generally more data intensive than other, more standardised trades – and also require greater risk management.
So how should asset managers contend with the data waves caused by these two storm fronts crashing together? The answer is that they need to streamline their boat – no mean task.
Currently many buy-side institutions manage their processes with fragmented systems, disparate spreadsheets, complex customised downstream and manual processes – all of which create a web of silos. This can result in real headaches. One asset manager I was speaking to recently could only process three of a certain complex OTC derivative a day, as his systems just could not cope with any more and back office workarounds had to be installed. If asset managers want to overcome these issues, they need to update their wider infrastructure and ensure that they have the data governance processes in place, front to back, to effectively manage not just their trading, but also administration and execution.
One issue when implementing this, though, is that all too often the businesses users captaining the boat don’t take enough of a lead role. Those in the back office have a great understanding of technology, but it’s only when a holistic view is developed, taking into account business needs and technological opportunities, that a strong solution can be found.
What’s really needed is for buy-side institutions to adopt a process-driven approach, whereby infrastructure and data management solutions are specifically wrapped around business requirements. The ultimate goal is to develop a framework that enables business users to monitor risk and compliance in real-time. Get this right and not only do you meet regulations – you also reduce your operational risk, improve your data governance and are more free to focus on generating alpha for clients. Then it’s plain sailing and blue skies ahead.