Buy Side Short on Derivatives Infrastructure

Terry Flanagan

Buy-side investors have been increasingly branching out beyond plain-vanilla stocks-and-bonds portfolios, deploying derivatives such as futures, options and swaps to try to boost risk-adjusted return.

But on balance, asset managers’ infrastructure has not kept up with the evolution, and for some firms, significant attention is needed on front, back, and middle offices in terms of capacity to process derivatives transactions.

That’s the view of technology providers SimCorp and Citisoft, which conducted a webinar to discuss the topic last week.

“Asset managers should really consider changing or reassessing their systems and technology platforms,” said Paul Migliore, chief executive of CitiSoft. “More advanced technology will drive investment performance as well as mitigate risk and cost.”

According to speakers on the webinar, dated technological infrastructure has become a legitimate concern that can result in an asset manager being unable to support the timely modeling of new instruments, an erosion of competitive advantage, and a slower time to market new products.

There has been an ongoing, regulator-driven transition for over-the-counter derivatives, which are being pushed from privately negotiated transactions to transparent trading and central clearing. “Trading will take place on fully electronic platforms, have mandatory central clearing, and a reporting into new trade repositories,” said Migliore.

Technology will continue to evolve, and buy-side usage of derivatives is here to stay, Migliore said. The use of derivatives has increased to the point where it is no longer is accurately categorized in the alternative trading.

“The potential of risking costs on legacy platforms is very real – it is both a ‘real’ factor and a ‘fear’ factor,” added Migliore. “Regulatory changes are underway and the risk of providing support on legacy systems is great.”

Implementing state-of-the-art derivatives processing can “make a big difference in integrated workflows, accurate reporting, and the implementation of new financial instruments.” Migliore said

Adapting to this shift will likely be different depending on the company. “Each organization will have its own set of struggles, but the most effort and change will most likely take place in the mid- and back- office,” noted Migliore.

Looking at the big picture, he added “we have an opportunity for change to drive better investment performance.”

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