They say you can’t outrun your past. I say that’s quite right. Sometime in 2011, I decided to leave the finance industry and start a career in journalism. Before deciding to give up the potential riches I could have gained from finance, I spent many days—too many, if I’m being honest—calculating net asset values (NAVs).
I was a fund accountant, and I started my career at RBC Dexia Investor Services (now RBC Investor Services), based in Malaysia. Sometimes I still dream of the paychecks I could have earned if I hadn’t left finance (though I definitely wouldn’t have stayed in fund accounting).
Every day at RBC Dexia I would look at the sells and buys that the custody team input into the funds and if the price and quantity were accurate, and I’d correct any errors. I monitored when corporate actions affected the securities within the funds I managed. Once done with the fund, I would run a program that spat out the NAV, and then the checking began.
I thought I had left that life behind when I ventured into journalism, but now over a decade later, I am now having more conversations about post-trade—which is an emulsion of the entire back office including fund administration, and even a little of the middle office—than I’ve had since I left fund accounting.
A former colleague who still works in that sector tells me the systems and processes, as well as the time and effort that go into producing a NAV—it is all still the same. I don’t know whether to laugh or cry when I think about what I’d be doing if I had chosen to stay. I don’t mean any disrespect to those who have found a passion in fund accounting; it just wasn’t for me. I much prefer speaking to the most intelligent people who deal with post-trade challenges.
There have been many innovative changes in the financial industry over the years, but few in the back office, for a couple of reasons. Budget tends to go to the front office where the money is made. And it is harder to facilitate wholesale changes where there are many moving parts and intertwined systems. Having part of that go down is not an option.
But some banks and asset managers have realized that middle- and back-office innovation could help the front office lower costs, increase efficiency, and find alpha.
All about the data
All change is for naught if it doesn’t allow data to flow easily from the back office to the middle and front offices.
There are many choke points in the post-trade ecosystem, including inconsistencies in know-your-customer and anti-money laundering (KYC/AML) and regulatory checks at the point of onboarding; non-standard uncleared margin and collateral processes; identifying accurate trade data; internal and external data reconciliation; resolving trade errors; cybersecurity; and fraud prevention, among others.
However, according to Brock Arnason, founder and CEO of regulatory compliance and real-time controls solutions provider Droit, many of the choke points arising in the post-trade ecosystem originate in pre-trade, sometimes as early as the point of client onboarding. Upstream data that is inconsistent, inaccurate, or missing creates problems later in the trade lifecycle.
“Because of this, we see firms constantly sorting out errors through time-consuming reconciliations and exceptions to resolve issues that would not exist if systems were carefully architected at the start. Fixes for these choke points are band-aid solutions to systemic problems,” he says.
Strategic solutions require clarity and visibility at each step along the data pipeline. The challenge is that most firms have multiple, complex systems that don’t talk to each other effectively.
“With intense regulatory review that is virtually contemporaneous to trade execution, information flowing from multiple sources results in chokepoints stemming from the data pipeline. This is observable in trade lifecycle reporting, corporate actions, position reporting, transaction reporting and more,” he says.
For example, transaction reporting is complex, under high levels of scrutiny, and needs to be submitted in a short time window. Many firms have disparate trading systems for which they need to clean up, map and transform data for proper reporting. Arnason says ineffective chains of information internally lead to inaccurate and incomplete information on what needs to be reported, when, and how.
Ryan Burns, head of global fund services, Americas, at Northern Trust, also agrees that data accessibility and quality remain the top challenges in the post-trade environment across markets and investment strategies.
“Multiple constituents need data for a variety of purposes, so post-trade execution data must be consistent and accessible to all parties. The same data might be needed for back-office reconciliations, investor reporting, performance, and client reporting, and for funds in multiple jurisdictions at different times during the day, month, quarter, or year. Ensuring the right data is available in an accessible format and across multiple user systems is challenging as ecosystems evolve and new technologies are deployed,” he says.
But firms have new and adaptable technologies in their hands now—desktop tools, cloud technologies and APIs, and even blockchain—that make data more accessible to users across the front, middle, and back office.
Burns says cloud technologies have improved system accessibility and APIs allow systems to communicate more quickly and in real time, reducing the impact of end-of-day issues and downtime.
Droit’s Arnason says when evaluating how to put tools into practice, API-based solutions allow firms to build a best-of-breed solution by picking and choosing components that fit their needs. Cloud solutions, on the other hand, enable rapid deployment and reduce overall costs.
“Whichever route is chosen, ultimately what helps firms is automation and digitization to provide a seamless, single-source and action when it comes to the complexities of regulation and compliance,” he says.
Where firms may fall short is in the implementation process, and any change, particularly in the back office, often takes a while longer to happen.
Northern Trust’s Burns says the most successful implementations begin with solving a challenge facing the firm and offering a way to realize the benefits of a new technology or process quickly. “If investment book of record data is not consistent across multi-asset strategies, partnering with an outsourced service provider could be the best place to start,” he says.
Could large-scale changes come to fund accounting processes? How would they happen? Or, in 10 years from now, will it still be the same?
I’m not trying to outrun my past—I’m embracing it! So if you want to chat about fund administration or any other functions within the post-trade ecosystem (I know, there are many!), drop me a note: wei-shen.wong@infopro-digital.com
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