March 2016

OPERATIONS & IT: Winning the IBOR war

Egyptian hieroglyphsCreating a central book of investment records that tells the entire story of a firm’s activity is at the heart of software development, says Nicholas Pratt. The investment book of record (IBOR) is supposed to be a firm’s most-up-to-date record of current positions, exposures, counterparties and cash holdings, and it provides the basis for making investment decisions.  The IBOR concept has existed for some time but has undergone a recent resurgence. It is also much harder to produce one. In part, this is because investment managers use many different systems in their organisations that use data in disparate contexts. For example, back-office systems tend to be deployed across an entire firm and used to create a firm’s accounting book of record (ABOR) – but they work on end-of-day processes. In contrast, front-office systems tend to deal in intra-day and even real-time processes, but typically operate in asset class silos.  Software providers say this operational shortfall has made the IBOR fundamental to front-office staff who may be asked by investors and regulators to provide intra-day positions and for being agile enough to react to volatility in multiple asset classes.  “If you talk to portfolio managers, you might hear two stories – that they sold stock on positions they didn’t have; or that they have to keep a 2% cash buffer for client redemptions but are not given an intra-day cash forecast,” says Gernot Schmidt, launch manager, front and middle office, at software provider SimCorp. “This is all due to the absence of a single source of truth.” Everyone now agrees on what the IBOR should be; the divergence is in how different firms are trying to create it and implement it, says Olivia Vinden, principal at consulting firm Alpha FMC. Vinden has seen three different approaches emerge among asset managers.  One approach is to rely on outsourcing providers to either provide an enhanced ABOR for constructing the IBOR or, where managers have already outsourced both middle and back offices, simply to entrust their outsourcing provider with all responsibility for the IBOR. An alternative approach is for firms to address this in-house via a software provider, such as Aladdin, Bloomberg, SimCorp, Charles River and Eze Software, all of which offer an IBOR product. Improvements in enterprise software, plus concern from regulators over asset managers’ reliance on asset servicers for many core operational tasks, have made this a more viable option, says Vinden.  NO FIRM HAS CRACKED IT
However, for those firms seeking to go beyond a basic IBOR and capture more intra-day events, like an income event, a corporate action, or cash coming in from an investor, the right system might not be out there quite yet, says Vinden. “All of the major software vendors and service providers have an IBOR offering and they would all testify to having an intra-day capability – but the reality is that no single vendor has definitively cracked this puzzle yet.” While the IBOR may be a simple concept, the actual implementation is complex and daunting. Some consultants think it is important to look beyond the IBOR as a simple book of record and also to consider other systems that have to work alongside it.  “Everybody needs an IBOR, the question is how deep you want it to go. It is the same way that everyone may need a car but not everyone needs a Ferrari,” says Joshua Satten, director, business consulting and architecture at Sapient Global Consulting. Managers should keep in mind the products they trade and where they trade them, as well as what systems they already have in place. And they should also avoid thinking that once the system is implemented, the hard work is done, says Satten. “It is not a case of ‘set it and forget it’. That attitude is equivalent to building a factory and expecting it to run itself. An IBOR has to be managed every day.” Asset managers should also not assume that a single product will meet all of their IBOR needs, says Jay Wolstenholme, a senior analyst with research firm Celent’s Securities and Investment Practice. The vendor market is, however, completely capable of providing all the components needed to make an IBOR, says Wolstenholme.  The trick is to provide the right suite of services to match the business needs of the asset manager and to do all of this through what has been dubbed a ‘services-oriented architecture’, which allows for organised growth, says Wolstenholme. “If you build it really simply and start with the core atomic data like a security master, the accounting record and trading and positions information, once that is correct, you can add on modular functions – P&L, reporting, risk and compliance.” Not everyone is sold on the IBOR sales pitch, though. “I am sceptical,” says Steve Young, a principal at consultant Citisoft. “I see it more as a marketing tool from the software and consulting community. Some asset managers may need an IBOR but there are others that do not.” There is an air of artificiality about the IBOR concept, says Young, that comes more from vendors looking to turn a few similar projects into a new business need rather than any drive from managers.  The indifference to the IBOR is most evident in the front office, he says. “I am not hearing many of them talk about an IBOR. Yes, they want to work with start-of-day data rather than end-of-day data, particularly when it comes to their cash positions, but a sophisticated accounting system could supply all of this information. I don’t think it is always necessary to go through the whole effort of implementing an IBOR.” This is not to say that there is no need for an IBOR, says Young. For asset managers with a complex web of IT, born from a policy of buying best-of-breed systems or else with an over-reliance on legacy systems, implementing an IBOR to suck all of the data out of these inconsistent systems into one aggregating and up-to-date tool makes sense.  “However, even then, implementing an IBOR may not be the best way to go about it. It probably makes more sense to address the underlying problem and replace the legacy systems.” Some discussion is still ongoing about alternatives to an IBOR implementation: a data-scrubbing tool; an extension to the data warehouse; or a more sophisticated ABOR. “Some will say you need a data warehouse as your IBOR, but it has no business logic,” says SimCorp’s Schmidt. “It does not know what to do with the life-cycle elements or how to calculate cash forecasting or exposure.”  Schmidt is also dismissive of the IBOR offerings from various front-office providers that he says have jumped on the bandwagon. “Front-office systems cannot deal with cash forecasting on complex asset classes. An IBOR will require central resources and a chief data officer to take ownership of the system. It will also require data quality management.” For front-office vendors, the IBOR concept could pose a significant threat, says Young. If asset managers were to use a single IBOR as the hub in a ‘hub and spoke’ operating model, it would enable them to have a more complex front-office environment where systems are much more dispensable. “If you lose the IBOR war, you become less sticky.” CUSTODY BANKS
And for the custodians trying to enter the IBOR market, Young questions whether they are best placed to do that. “One role of the IBOR is to provide some level of oversight over third-party providers like custodians. But if the custodian is providing the IBOR, who is providing the oversight?” Talk of an IBOR war suggests that this is an area that is far more important to the vendors than it is to managers. This is not to say that an IBOR has no value – that it is more IBORE than IPHWOARR – but the stakes are possibly higher for vendors and service providers. For example, if the IBOR becomes the glue that holds everything together, then the provider of that IBOR becomes indispensable to the fund manager. Meanwhile, every other system may face a less certain future. Software providers are aware that asset managers are suspicious of their motives. “Cynicism is understandable when a new concept creates a lot of work that you don’t necessarily want to do,” says Schmidt. “But the IBOR is a solution to a problem costing managers a lot of money.” A cynic may say that it is a problem costing software providers a lot of money.  Young’s advice for any asset manager considering the purchase of an IBOR system is to go in with their eyes open. “What problem are you looking to solve? You should not be looking at an IBOR because you don’t have one but because you need one.” ©2016 funds europe

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