Technology Keeps Buy Side in Check

Terry Flanagan

On August 5, Standard & Poor announced the first-ever credit downgrade of U.S. sovereign debt from triple A to AA+. Markets participants reacted negatively, with drops in the Dow Jones Industrial Average at 650 points in a single day.

As with many of the drastic, macroeconomic, and regulatory changes that have sprung since 2008, bad news means regulators, compliance officers and vendors are kept busy. For institutions, such as pensions that can only hold prime debt, checking in with their portfolio holdings became paramount.

“Several of our larger top tier clients were already running many different scenario analyses to see if they were going to remain compliant in the weeks prior to the downgrade,” said Matt Grinnell, buy side compliance officer at Fidessa. “As you can imagine, the vast number of portfolios that needed to be checked realistically can’t be done on a manual basis. They were relying heavily on our technology to help them with this process.”

Despite concerns among clients about holding out-of-mandate bonds, only one or two clients’ portfolios were severely impacted by the downgrade , said Grinnell. Yet, perhaps the lesson learned is that the concern is not the downgrade itself, but rather resources implemented to keep operations in check.

“Our clients were in a very good situation with not only their portfolios, but with their clients as well- which was ultimately fuelled by the technology they had in place,” Grinnell noted. “We really didn’t hear of anyone scrambling around doing massive rebalancing.”

Fidessa’s larger clients have become more “more conscious of the downside when running close to a benchmark,” stated Grinnell. “As sort of an in-house policy, they were inserting a bottom limit on the credit rating for the portfolio, trying to prevent slipping even one subclass below whatever the average index may be.”

Staying prepared in the event of another macroeconomic event that could affect holdings, such as the S&P downgrade, should be top priority for buy side asset managers, according to Grinnell, who advocated that vendors help clients implement a forward-looking, defense mechanism for sudden changes.

“You really shouldn’t have your managers scrambling when that information comes out- they should be making proactive decisions, not reactive –and using technology to help them,” he said.

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