Buy Side Hindered By Legacy Systems

Terry Flanagan

A number of buy-side firms still rely on legacy systems even as they seek to generate alpha through alternative investment strategies.

When asked if their firms need to create workarounds to support derivatives in current middle- and back-office operations, 82% of respondents said yes, according to a poll conducted last month by SimCorp, a provider of investment management services. Additionally, over one-third of respondents admitted that the accuracy of client reports is compromised due to the need for extensive workarounds.

Responses came from nearly 135 executives from 84 North American-based capital markets firms.

Buy-side respondents admitted that legacy systems hamper new product time-to-market, compromising competitive advantage.

Fifty-three percent revealed that their systems require at least two months to model and launch new derivatives products and sometimes significantly more. For 22% of firms, this takes a minimum of four months. Only 24% can roll out a new offering within one month while 4% are entirely unable to launch new products using their current systems.

“The risks associated with legacy technology platforms are real,” said Paul Migliore, CEO of Citisoft. “Traditional, long-only investment platforms were designed to support specific sets of functions such as order management or accounting.”

The demand for alternative assets and innovative products has outpaced the technology platforms that are currently utilized in most investment management firms. Buy-side firms must transition from legacy platforms to state-of-the-art systems that broaden their asset coverage capabilities, especially in derivatives, and enable user control for queries, data access and reporting.

“The number of buy-side firms still attempting to process derivatives on disparate legacy systems is troubling given the system deficiencies that were exposed during the financial crisis,” said David Kubersky, managing director of SimCorp North America.” Manual processing and costly errors hinder vital business growth.”

Processing derivatives on state-of-the-art technology systems enables asset managers to boost return rates and deliver the transparency and accuracy that investors demand.

An Investment Book of Record (IBOR) is a set of investment data that is maintained with the primary purpose of supplying timely and accurate data to the front office of an investment manager to support the investment decision process.

Equally important to servicing front office needs, a well-constructed IBOR supports middle- office business functions such as calculation of daily security level performance measurement and portfolio attribution, oversight of the back office or custodian, management reporting, client billing, and client statements.

The IBOR is typically processed on a trade date basis, meaning any trades are recognized as part of the investment book on their market trade date.

“A state-of-the-art system should include an IBOR that serves as a single source of truth from front- to back-office,” Kubersky said. “Additionally, this system should offer integrated workflows in managing cash, margins, deliverables and collateral, accurate reporting and the ability to quickly introduce new products to market.”

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