At a recent industry panel discussion on the operational support of derivatives in fund management, industry experts concluded that investment managers don’t yet have the systems to meet their operational needs when using OTC derivatives.
The panel discussion ‘Operations: Supporting Derivatives’ was chaired by Catherine Doherty, Principal at Investit, the leading fund management consultancy. The panel included representation from International Swaps and Derivatives Association, Eurex, Threadneedle Asset Management, JPMorgan Worldwide Security Services, and Swapswire. The panel discussed operational issues, such as management and margining, pricing and valuation issues and trade confirmation.
The panel agreed that the major issue for investment management companies using derivatives was the capture and use of data when trading derivatives. Investment management companies need the ability to view a derivative as an individual instrument and as part of an aggregated/disaggregated portfolio or investment strategy – combined with the physical assets. Tracking a derivative downstream from the trade for operational, risk, performance and client reporting requirements is very labor intensive without formal systems. Investment managers’ operations areas are struggling without complete data capture at time of the trade and the core accounting systems coping with these instruments.
While system vendors are making great advances into the area of derivatives, they are still behind investment management companies’ needs. There are good systems for physical assets and exchange traded derivatives and good systems for OTC derivatives. But there is no integrated platform that is good for all instruments. And there is no quick solution to the problem for investment management companies. Third party administrators are coming up against the same challenges. While they have the systems in place to capture and process the lifecycle of OTC derivatives, they can’t yet provide a single platform to meet all their clients’ requirements.
The panel agreed that one of the major issues involving OTC derivatives – outstanding confirmations – had been much reduced through systems such as Swapswire and Depository Trust & Clearing Corp.
Commenting on the panel discussion, Doherty at Investit said: “Derivatives are a new category of instrument for many who are still feeling their way in this evolving market. Our panel discussion gave them food for thought. Fund managers’ operations departments really need systems that aren’t yet in existence. They need to view portfolios on an aggregated/disaggregated and individual security basis. And without the data to do this, it is unlikely they will be able to keep pace with the rate of growth in the use of derivatives by the front office.”
“Outsourcers are also facing problems in this area. While they have different systems for tracking individual assets, including OTC derivatives, they have not yet found a way to integrate these into one platform to provide investment managers with the full support they need.”
