Operations Central to Risk Management


Looming regulations are testing the ability of capital markets firms to maximize operating efficiency, as the weight of requirements spanning trade execution, clearing and reporting makes itself felt.

Joshua Walsky, chief technology officer, Broadway Technology

For example, Title VII of the Dodd-Frank Act—along with its international counterparts—will create upheaval in the OTC derivatives markets, with implications for trade capture, confirmation, trade reporting, compliance and margining processes.

“Firms are constantly focusing on operational improvements, efficiency improvements, business growth opportunities, improved risk management and other various initiatives,” said Joshua Walsky, chief technology officer at Broadway Technology.

Project teams responsible for these improvements are well aware of impending regulation and take them into consideration.

“There is someone in the project planning meetings who is asking the questions, ‘What about compliance and regulatory requirements? and ‘How will those be handled?’” said Walsky. “This knowledge is being woven into their technical plans.”

New reporting requirements for hedge funds, especially Form PF, aimed at assessing systemic risk under the Dodd-Frank mandate, will tax the resources of fund managers and service providers alike.

“Regulatory compliance entails a robust operational and regulatory infrastructure for both start-up and established hedge funds, as well as a proactive approach to manage audit and tax process in order to fulfill various regulatory requirements,” said Alberto Corvo, managing principal for financial services at outsourcing firm eClerx.

Shrink-Wrapped Hedge Fund

By accessing integrated hedge fund administration, technology and operation in one step, fund managers can launch in shorter timeframes, drastically reduce fixed costs and trade substantially all asset classes, knowing that the backbone has the capabilities to process them.

TotalHedge3, a fund administration, technology and middle office processing platform launched by eClerx in collaboration with Trinity Fund Administration and Arbor Financial Systems, is aimed at empowering fund managers to simplify investment decisions and improve operational efficiencies, while satisfying investor and regulatory needs.

The platform is essentially a “shrink-wrapped” hedge fund, providing managers with a single source for all functions needed to run a fund such as trade processing, fund administration, technology, compliance and regulatory support, Corvo said.

Trade processing requires front-to-back support covering trade capture, affirmations, confirmations and settlements using workflow tools and best practices to minimize operational risk.

“Managers require the capability to allow for diversification of trading strategies and quick exploitation of ideal market conditions,” said Corvo.

The demands of fund operations necessitate state-of-the-art technology and services.

“As hedge funds continue to expand into new asset classes and markets in addition to bringing on multiple prime brokers, the business has simply become too complex to manage with a spreadsheet,” said Matthew Nelson, executive director of strategy at Omgeo. “They recognize this is a source of both cost and risk and are looking to automate as much as possible.”

According to a survey conducted by Omgeo, a provider of post-trade services, 92% of firms will make operational changes in the next year to 18 months, with new regulations as the primary driver.

As a result, asset managers are looking to outsource middle-office functions, especially collateral management.

Outsourcing operational functions is a mature concept and is a viable option for certain asset managers. Another proven, long established option is the outsourcing of an asset manager’s technology.

“Both these models will grow as an increasing number of buy-side participants realize that in-house development and maintenance of technologies in a time of significant industry change is not a core competency of an asset manager,” said Ted Leveroni, executive director of derivatives strategy and external relations at post-trade provider Omgeo.

“Hiring a vendor to keep up with technology and the ever changing global landscape makes business sense.”

Quick Fix

Fix Protocol Limited (FPL) has published Fix guidelines to enhance the global equity post-trade process between the buy side and sell side. The guidelines were produced by the FPL Americas Buy-Side Working Group and cover post-trade processing for both US and non-US equity markets.

Fix is used extensively for equity order placement, and in response to requests from the investment management community, and FPL is keen to promote adoption to support equity post-trade processing. Adoption will enable the industry to benefit from increased straight-through-processing, improved availability and enhanced transparency through ID-linked traceability from placement to pre-settlement.

Many parties must co-operate in the post-trade process including the buy side, broker dealers, custodian banks and central clearing.

“The current process is complex and requires considerable human intervention,” said David Tolman, technology manager at Greenline Financial Technologies. “The Fix infrastructure, knowledge and data, from the extremely successful use of Fix in order processing, can now be leveraged in the post-trade process. “

Extending the use of Fix substantially reduces complexity in the communication and matching process, resulting in fewer matching issues, faster processing and lower costs, Tolman said. The availability of an industry standard will reduce implementation and on-boarding time, and the associated financial investment.

Promoting Fix adoption for post-trade processing is consistent with the recommendations set forth in the widely adopted Investment Roadmap, which FPL produced in collaboration with other standard bodies to support business processes throughout the trade lifecycle.

FPL noted that Omgeo, a joint venture of the Depository Trust & Clearing Corporation and Thomson Reuters, supports post-trade services through OASYS (to communicate and match allocations) and TradeSuite (to communicate confirmations, match affirmations and pass affirmed trades).

Related articles

  1. Regulators will likely separate custody from other crypto exchange activities.

  2. Basel Committee Consults on Interest-Rate Risk

    Final LIBOR publication would be end-September 2024.

  3. Low Bond Yields Force Pensions’ Hand

    US Department of Labor has allowed pension plan fiduciaries to consider ESG factors.

  4. Goldman Sachs Asset Management agreed to pay a $4m penalty.

  5. FINRA membership marks further momentum in WisdomTree Securities' digital strategy.