Complex products & high volume: Buy-side challenges

When do buy-side firms – institutional investment managers, alternative/hedge funds, and fund administrators – start to reassess their reconciliation and control platforms? In our decades of experience in buy-side investment operations, it tends to happen when two compelling events arise: ongoing problems with legacy systems and new challenges around complexity.

The interesting thing is, that these are not mutually exclusive issues. The growing need to scale to higher volumes, add sophisticated assets, and manage the intricacies of global expansion means taking a closer look at the integrity of your data and operational infrastructure.

The key problem is that legacy systems designed primarily for vanilla cash and stocks crack under the pressure of complex reconciliations, high volumes, and the need to onboard controls quickly.

Here are four crucial areas of buy-side reconciliation and operations that firms are increasingly having to deal with – but can easily be remedied with the right technology:

1. Esoteric products and asset classes

The search for alpha in a challenging economic and market environment is driving more emphasis on financial and risk controls, hedging strategies, and global investments.

• Exchange-traded (ETD) derivatives, over-the-counter (OTC) derivatives, and bank debt
  
  
• Foreign exchange (FX) and currencies, FX forwards, and FX futures
  
  
• Alternative and digital assets
  
  
• Controls for margin, collateral, corporate actions, and securities lending
  
  
• Account-based reconciliations
  
  
• Support for fee billing calculations and client invoicing

 Reconciliation data and control systems must be able to handle high volumes of not just simple cash and stock recs, but also the most complex products and asset classes. In addition, the solution provider must have a keen understanding of transaction lifecycles for all the complex products you trade.

2. Structured and unstructured data

A majority of data (80% or more) is unstructured, and only 18% of organisations take advantage of that data, according to a 2019 Deloitte survey. In the data-driven financial industry, structured and unstructured data have largely remained separate. Often sitting dormant because firms lack the tools to harvest their full potential. But “unstructured” does not have to translate into “underutilised.”

As buy-side firms expand upon their digital transformation projects, the ability to categorise and extract information from both unstructured or non-standardised data, and quickly and accurately match non-standard data from multiple sources, is critical to rapidly onboard controls. This also offers the potential to apply AI capabilities to read unstructured documents for analytics, audit, and other purposes.

A solution that can transform and aggregate both data types centrally will provide firms with greater potential for data utilisation while also removing critical reconciliation and operational roadblocks.

3. High-volume agility

The investment management industry has experienced unprecedented growth in trading and data volumes. With volatility at an all-time high, the ability – and flexibility – to scale on demand has never been more urgent.

A reconciliation solution should be able to meet the requirements of your worst and best trading day. That means reconciling tens of millions of records in a day, even with N-way reconciliations at play, and capabilities to handle lot sales, tax lots, and big block trades.

That’s where agility – through self-sufficiency – becomes essential. Having a rules-based framework for bringing in the right data, building and managing reconciliations, and creating custom workflows accelerates time to market, removes limitations and risks, and enables you to capture your unique IP.

4. Buy-side expertise

As firms deal in more complex asset classes, many more data points need to be collected in different ways. Maybe some of your data comes to you in pdfs. Or it arrives in multiple feeds and separate files. All that information needs to be aggregated, normalised and validated.

The question is, do you want to keep your scarce operations staff mired down with data collection and routine reconciliations? Or would you rather they spend their time on true exceptions or other tasks that add more value?

After all, the goal is to get optimal outcomes for reconciliation. And, it’s easy to get underwater in terms of workload. With already high employee turnover in operations, the best approach is to work with a solution provider with the expertise and support to act as an extension of your team.

With an experienced managed services team handling routine reconciliations and data aggregation at your side, your firm will have better success at combatting the talent shortage, eliminating key-person risk, and slowing the churn rate.

More complexity ahead: Are you ready?

Market volatility, the search for alpha, and ever-evolving regulations are here to stay. The probability of post-trade operations issues emerging in a period of constant structural change and rapid economic swings grows by the day.

But there’s no need to tackle the challenges alone. Look for solutions that can handle all the high volumes and complex data and control your legacy systems can’t do today without spreadsheets, workarounds or manual work. From agile, and self-sufficiency to managed services, a provider that offers flexibility and scale will offer the best strategy to help your firm achieve sustainable and resilient operations – and address even more complexity down the road.