The cure for the buy-side blues: interoperability in an era of change
25 Nov 2020
As capital markets functions converge are increasingly outsourced, asset managers face existential questions about consolidation or partnership. But who is the right partner to help them navigate this turbulent period and emerge ready for a competitive future? SWIFT’s Stella Lim explains more
Image: SWIFT
Throughout 2020, the beleaguered buy-side has faced new pressures. The market volatility stirred by economic reverberations of the global pandemic has ruptured business-as-usual. For many capital markets players, it has introduced new pain points and has exacerbated existing industry issues, such as manual processing.
But these are just new creases in a surface where deep wrinkles had already formed. Asset managers were already under increased pressure from maturing regulatory regimes around research and reporting, they have been facing more aggressive demands from investors in an era of evaporating alpha and are all too accustomed to being scrutinised for their data hygiene, for instance in how they demonstrate their compliance with environmental, social and governance (ESG) mandates. Taken together, these challenges can appear insurmountable and paint a gloomy picture for the asset management industry.
However, where there are challenges, there are always opportunities. An already accelerating trend toward consolidation is quickening. New partnerships are burgeoning. And for some asset managers, ‘coopetition’ – collaboration between competitors – is allowing them to expand on limited portfolio options and offer their clients more blended and bespoke services. For example, combining offerings can serve to highlight key differentiators for asset managers, such as the fact that their clients still rely on them as an entry into non-standard asset classes like real estate, derivatives, private equity and even crypto-assets.
In this new area of increased partnership, asset managers can benefit from the combination of powerful brands but an old problem has reared its ugly head -- many institutions on the buy-side, not just asset managers, use different data formats and standards. Like tectonic plates, layers of technology have created fault lines that lead to disparate reporting systems and proprietary standards – all of which have led to an industry that’s not particularly interoperable.
A lack of interoperability isn’t good for an industry that still relies on fax machines and ink. Nowhere is this more obvious than in the areas of collateral management and reconciliation, where a high volume of manual intervention is still required. Transposition errors and data mismatches due to these processes create inefficiencies that drive up costs.
Drowning in a sea of spreadsheets, asset managers are increasingly outsourcing more and more functionalities to third parties to modernise and meet client demand. Short of ripping out your entire back office and re-building from the ground up, there is little choice but to partner. Shopping out services only reduces the workflow, it doesn’t reduce responsibilities towards clients and regulators. Faced with an increasing burden, these pressures are forcing mid-sized asset managers to either shed functions or to find the perfect partner to fill in the gaps.
Choosing the wrong partner can leave an asset manager reliant on a vendor – even if the service doesn’t quite match the description on the tin. In fact, asset managers often discover a mismatch between what is offered and what they actually need. If they change their mind, apart from switching cost, it’s also challenging, and costly, to re-internalise outsourced activities. Furthermore, this process is no mean feat and a transition can take around nine months to fully execute.
Modern asset managers serve a global client base. So they have a strong need to connect to multiple custodians in order to serve their clients’ needs. For them, integration isn’t a simple prospect. It means working with different data formats, not to mention the differing levels of quality of data flows. Maintaining consistency between your data and outsourced data can be challenging – and costly.
What asset managers need is quite simple. They need a way to capitalise on data. Not only market data, but their own proprietary data. So, internal and external data needs to be interoperable and formatted for a present need for automation and a near future with artificial intelligence (AI) and machine learning. Data that doesn’t have to be transposed, manually from window to window. A single, full-service standardised gateway would do the trick.
But they also need service with a global edge – an offering with both the kind of reach that stretches into every major global market, but avoids the pitfalls of aligning regulatory compliance practices across disparate markets.
Most importantly, they need to connect securely and easily, not only to the vendors that best fit their needs, or to a counterparty, but to a global ecosystem. A truly international ecosystem that includes current and future clients. An ecosystem that is also a green field for innovation and a collaborative environment, where layers of new value-added services take shape and an enhanced customer experience is delivered.
SWIFT is working closely with its community to build such a platform. It will enable greater transparency and increased efficiency in unprecedented ways for global securities players. By focusing our efforts on reducing risk and settlement failures, delivering end-to-end transaction monitoring that provides visibility on the latest status – starting with settlement instructions, but with the plan to extend to other parts of the securities lifecycle such as corporate actions and collateral management – in near-real time and building a consolidated, real-time view of holdings across providers, we are answering the need of the industry in an unprecedented way.
For over 40 years, SWIFT has provided secure and reliable financial messaging to the world’s financial services industry. Less commonly known is the fact that securities-related messaging now represents over half of the traffic on SWIFT. Now we are working with capital markets players – and the asset management community specifically – to co-engineer a platform that will deliver greater efficiency and transparency than ever before.
But these are just new creases in a surface where deep wrinkles had already formed. Asset managers were already under increased pressure from maturing regulatory regimes around research and reporting, they have been facing more aggressive demands from investors in an era of evaporating alpha and are all too accustomed to being scrutinised for their data hygiene, for instance in how they demonstrate their compliance with environmental, social and governance (ESG) mandates. Taken together, these challenges can appear insurmountable and paint a gloomy picture for the asset management industry.
However, where there are challenges, there are always opportunities. An already accelerating trend toward consolidation is quickening. New partnerships are burgeoning. And for some asset managers, ‘coopetition’ – collaboration between competitors – is allowing them to expand on limited portfolio options and offer their clients more blended and bespoke services. For example, combining offerings can serve to highlight key differentiators for asset managers, such as the fact that their clients still rely on them as an entry into non-standard asset classes like real estate, derivatives, private equity and even crypto-assets.
In this new area of increased partnership, asset managers can benefit from the combination of powerful brands but an old problem has reared its ugly head -- many institutions on the buy-side, not just asset managers, use different data formats and standards. Like tectonic plates, layers of technology have created fault lines that lead to disparate reporting systems and proprietary standards – all of which have led to an industry that’s not particularly interoperable.
A lack of interoperability isn’t good for an industry that still relies on fax machines and ink. Nowhere is this more obvious than in the areas of collateral management and reconciliation, where a high volume of manual intervention is still required. Transposition errors and data mismatches due to these processes create inefficiencies that drive up costs.
Drowning in a sea of spreadsheets, asset managers are increasingly outsourcing more and more functionalities to third parties to modernise and meet client demand. Short of ripping out your entire back office and re-building from the ground up, there is little choice but to partner. Shopping out services only reduces the workflow, it doesn’t reduce responsibilities towards clients and regulators. Faced with an increasing burden, these pressures are forcing mid-sized asset managers to either shed functions or to find the perfect partner to fill in the gaps.
Choosing the wrong partner can leave an asset manager reliant on a vendor – even if the service doesn’t quite match the description on the tin. In fact, asset managers often discover a mismatch between what is offered and what they actually need. If they change their mind, apart from switching cost, it’s also challenging, and costly, to re-internalise outsourced activities. Furthermore, this process is no mean feat and a transition can take around nine months to fully execute.
Modern asset managers serve a global client base. So they have a strong need to connect to multiple custodians in order to serve their clients’ needs. For them, integration isn’t a simple prospect. It means working with different data formats, not to mention the differing levels of quality of data flows. Maintaining consistency between your data and outsourced data can be challenging – and costly.
What asset managers need is quite simple. They need a way to capitalise on data. Not only market data, but their own proprietary data. So, internal and external data needs to be interoperable and formatted for a present need for automation and a near future with artificial intelligence (AI) and machine learning. Data that doesn’t have to be transposed, manually from window to window. A single, full-service standardised gateway would do the trick.
But they also need service with a global edge – an offering with both the kind of reach that stretches into every major global market, but avoids the pitfalls of aligning regulatory compliance practices across disparate markets.
Most importantly, they need to connect securely and easily, not only to the vendors that best fit their needs, or to a counterparty, but to a global ecosystem. A truly international ecosystem that includes current and future clients. An ecosystem that is also a green field for innovation and a collaborative environment, where layers of new value-added services take shape and an enhanced customer experience is delivered.
SWIFT is working closely with its community to build such a platform. It will enable greater transparency and increased efficiency in unprecedented ways for global securities players. By focusing our efforts on reducing risk and settlement failures, delivering end-to-end transaction monitoring that provides visibility on the latest status – starting with settlement instructions, but with the plan to extend to other parts of the securities lifecycle such as corporate actions and collateral management – in near-real time and building a consolidated, real-time view of holdings across providers, we are answering the need of the industry in an unprecedented way.
For over 40 years, SWIFT has provided secure and reliable financial messaging to the world’s financial services industry. Less commonly known is the fact that securities-related messaging now represents over half of the traffic on SWIFT. Now we are working with capital markets players – and the asset management community specifically – to co-engineer a platform that will deliver greater efficiency and transparency than ever before.
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