07.20.2012
By Terry Flanagan

Regulations Forcing Buy Side to Upgrade Accounting Systems

New regulations which mandate reporting of derivatives are challenging buy-side firms to upgrade their core accounting systems.

“Firms are re-evaluating their accounting systems, which form the backbone of their recordkeeping operations,” said David Kubersky, managing director, North America, at SimCorp, a software provider.

Accounting systems have figured in most of the major financial scandals of the previous decade, beginning with Enron and continuing right on up through the financial meltdown of 2008.

“Historically, a lot of regulations have come about because of failings in accounting systems,” Kubersky said. “The financial crisis, which led to the Dodd-Frank Act, highlighted the inability of firms to build derivatives into accounting systems at a granular level.”

The investment world has changed dramatically in recent years, with complex investment strategies that allocate to diverse asset classes, including alternative funds, private equity, long-only funds, commodities and more.

This is primarily due to the current technology landscape, where disparate systems across the front-to-back office make it an uphill battle to calculate exposure, automate and optimize collateral allocations, automate position valuation and generation of variation margin.

The presence of silos, or buckets of asset classes, complicates the task of managing the ever-growing streams of real-time data flowing through markets.

Regulatory demands are placing greater pressure on global asset management firms to implement an operational infrastructure that allows for greater transparency and automation.

“The industry is moving away from spreadsheets toward automation, where machines will handle such back-office tasks as reconciliations and allocations,” said Chris John, chief executive of Bonaire Software Solutions, a software provider.

Bonaire has upgraded Revport, its expense management and fee billing software, to enable asset managers, mutual funds and capital market firms to process and reconcile fees more accurately.

“When an asset manager pays a fee to a broker-dealer to use its network as a distribution channel, it has a fiduciary responsibility to ensure that it’s not being overcharged,” said John.

The new version of Revport includes an add-on module which automates the process for calculating rebates, retrocessions, commission payouts and generating, receiving, reconciling and processing invoices.

In a recent SimCorp poll, 30% of buy-side firms stated that it would take them days or weeks to calculate their exposure across all holdings.

“With increased complexity across product classes, you need a single holistic view of positions,” said Kubersky at SimCorp. “With Dodd-Frank, firms have a clear mandate to drill down to a very granular level the instruments that underlie derivatives, which they can’t get with their legacy accounting systems.”

SimCorp Dimension allows fund managers to consolidate positions across all holdings in a central repository which in turn provides a timely 360 degree view of both investment performance as well as exposure, said Kubersky.

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