Accounting Issues Plague Buy Side

Terry Flanagan

Back office systems and data management issues are front-burner issues for the buy side as it wrestles with thorny regulatory compliance demands.

Close to half of the respondents to a poll conducted by investment management systems provider SimCorp are not confident that their current accounting systems can support the launch of new products in a timely fashion.

Additionally, almost 40% of firms surveyed state that they cannot support all major asset classes in one accounting system, leaving their organizations open to errors in data reconciliation, portfolio valuations, performance and exposure calculations.

“Time-to-market and transparency have become crucial for North American buy-side firms to stay competitive in the global arena,” said David Kubersky, managing director at SimCorp North America. “For individual firms to keep their edge, it is no longer going to be about the fanciest trading widgets. Instead, the foundation for success will rest on operational improvements, such as the centralization of the investment book of record across their entire portfolio.”

Accounting for derivatives transactions is a vital component of hedging strategy, yet many companies find the compilation of the vast documentation necessary to justify accounting treatment a daunting task.

Accounting for derivative financial instruments under the International Accounting Standards is covered by IAS 39 (Financial Instrument: Recognition and Measurement).

IAS 39 requires that all derivatives are marked to market, with changes in the mark-to-market being taken to the profit and loss account.

For many entities, this would result in a significant amount of profit and loss volatility arising from the use of derivatives. An entity can mitigate the profit and loss effect arising from derivatives used for hedging, through the process of hedge accounting.

To achieve the benefits of hedge accounting, however, requires a large amount of compliance work involving documenting the hedge relationship, and both prospectively and retrospectively proving that the hedge relationship is effective.

Separately, a poll of European, Middle Eastern and African investment managers, conducted by Bonaire Software Solutions, a provider of revenue management software for investment managers and capital markets firms, at its annual EMEA User Conference in London, revealed that the investment management industry is largely focused on data efficiency; 67% of respondents cited data consistency across business units as one of their biggest challenges with expense management.

Another 42% stated that consolidating data from various systems when faced with revenue reporting was a major challenge.

“Over recent years, several key themes have emerged, including increasing reliance on technology to drive operation efficiency, focus on client service and performance as a competitive differentiator, and concentration on data management and quality,” said Chris John, chief executive of Bonaire Software Solutions.

“Going forward, we can expect to see more regulatory pressures in North America and an increased push for further European harmonization, along with a further focus on operational efficiencies to help absorb the growing cost of regulatory compliance,” he said.

The SimCorp poll examined the impact of portfolio accounting systems on an investment manager’s growth strategies and vulnerability to operational risks. Respondents included 75 executives from over 50 buy-side firms across the U.S. and Canada.

Portfolio accounting is a critical component of an asset management firm’s operations, performing such vital tasks as trade capture, allocation and lifecycle management, net asset value calculations and reconciliations.

According to a survey of hedge funds conducted by Eze Castle Integration, an IT services provider, Advent products hold the dominant market share in portfolio accounting software, with APX and Geneva holding 20% and 17% of the market, respectively.

While 33% of firms are not using traditional third-party portfolio accounting software, preferring to outsource this function to an administrator, the survey found.

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