Data Management

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Bob Leaper
Bob Leaper
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IBOR Before It Was "IBOR"

While its catchy new nomenclature and explosion in popularity has given the outside world an impression that it is novel, the same conversations about it were happening twenty years ago. So why then is IBOR the latest buzz word for firms today?

The acronym "IBOR" (Investment Book of Record) has been omnipresent the past few months -- from press articles to conference circuits, it seems those four letters are the latest trend in investment management. What many may not realize, however, is that IBOR itself is not a new concept. In fact, it is very much the opposite. While it’s catchy new nomenclature and explosion in popularity has given the outside world an impression that it is novel, the same conversations were happening twenty years ago. So why then is IBOR the latest buzz word for firms today? 

Humble beginnings
The idea of getting intraday views of current stock positions was first introduced through trading blotters, and later spreadsheets that involved manual processes to get an understanding of exposure across investments. Order Management Systems help to solve the problem, but are effective on an enterprise-wide basis only if all assets are traded on a single system. While these methods were different in expression than IBOR as we know it today, the goal was similar: How can we as a firm better understand where we are today, versus where we were yesterday, and where we can reasonably expect to be tomorrow? As important, how can we consolidate and distribute that information in a way that is easy to interpret?

It was not until the 2008 financial markets crash that the importance of having a firm grip on one’s exposures across all systems became a top-of-mind issue again. Lehman's bankruptcy quickly sent up the warning flag to the entire industry. Firms quickly realized their vulnerability and susceptibility to a liquidity crisis without having the right structures in place to manage their counterparty exposure, cash, trades, and positions. 

Market drivers
Market crises and crashes inevitably cause a wave of introspection and a raft of regulation. But beyond the crisis, the investing landscape has evolved significantly in the past few years.

Many firms now execute global investment strategies available to investors across the world. Such firms are dealing with multiple start-of-day processes across different time zones that need to be reconciled and approved. Cleaning and validating these positions is part of the operations service level agreement to the front office, providing a fresh view of their cash and stock positions to cover investments, given the various settlement cycles.

Asset classes today are also much more complicated than they were five or ten years ago as firms reach for uncorrelated alpha to hit a goal or index-based mandates. FX and equity swaps, structured products, and alternatives like real estate -- now common investment instruments -- introduce new challenges to transparency.

Even with the dawning of Exchange Traded Funds on a number of exchanges, the volume of OTC instruments routinely traded on has exploded in the last decade, further complicating the picture. Fund structures, too, may be more complex, with fund of fund hierarchies meaning that some assets may not be directly held and therefore directly visible. Manual processes are simply not robust or scalable enough to pull the required data together, break down exposures, and report across these unique asset classes across the enterprise on demand.

For many firms, there may be multiple platforms and instruments used and information that lives across siloes within the firm. Many financial firms may also have been impacted by merger and acquisition activity. Therefore they have operational models that inherited the systems and processes of multiple firms. In this instance, the issue of siloed information may be even more vexing.

With increasing complexities and diverse investments, knowing your position and exposure is critical. It also has further pushed firms to consider implementing a way to view positions intraday, as opposed to only at close of market.

Behind closed doors
While external drivers are pushing more focus on IBOR, there are also trends internally at firms that have made it more front-and-center. The increased focus on data across industries (even beyond financial services) has created an expectation for on-demand data. This paradigm shift where consumers are accustomed to getting deep insights into various activities in real-time via smartphones and other devices, has bled into the enterprise and firms are feeling it too.

Compliance is also an internal player in the IBOR game. With regulations constantly changing, firms are increasingly looking for ways to control accuracy. Data management and, in some cases, intraday viewing are ways to assist in achieving such compliance.

IBOR's future
Despite IBOR being a common acronym in today's headlines, it is still in its infancy when it comes to being implemented in a modern guise across firms. Quite a bit of confusion also still exists around the topic -- with many different definitions in the market, some even misleadingly calling traditional, batch-processing systems an "IBOR."

We're getting to a point where having accurate, intraday and on-demand information across asset classes and geographies is going to be a standard, common deployment. A number of firms are very serious about getting IBOR formalized enterprise-wide and as result, fundamentally changing their operational models and divisions of responsibilities on downstream systems. That said, it's important to recognize that even though IBOR might be the latest buzz word, it's not for everyone. While we have seen it taking off in the institutional and wealth spaces, some firms don’t necessarily need it, especially if their infrastructure and investment strategies are pretty simple.

While intraday position-keeping in and of itself is not a novel concept, it is one that has come a long way with the capabilities of today's data management technologies. With real-time data analysis capabilities, coupled with shorter settlement cycles, it's likely we will continue to see eyes on IBOR. The industry will be watching to see how it fares over the next 10 years.

 

Bob Leaper is Head of Business Development at DST Global Solutions. Mr. Leaper brings more than 30 years of experience in financial services and technology organizations.  His areas of expertise include cloud computing, data management, accounting, performance, ... View Full Bio
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Noland01
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Noland01,
User Rank: Apprentice
8/20/2014 | 9:37:09 AM
The more things change, the more they stay the same....
When I re-read Bob Leaper's article, I had the same feeling that while the term is new, we're revisiting a topic that's been around since the early to mid-eighties - the concept of a book of record for the firm's investments or trades, and the "novel concept" back then that these books of records were fully reconciled with the custodians (and primebrokers).  Back then we were still wrestling with not only this but accrual accuracy and completeness (especially for international investments where the accrual rates vs. actual amounts paid were materially off (but still a problem today even with 25 years passing).

The biggest driver of today's refocus on this topic is the view that real-time data transparency has never been better and professional expectiations are rising everyday to get the data linkages between parties stronger, more accurate and fully reconciled.  In some cases, exposing the data in reports through on-line apps is forcing this discipline.  Back in the 1980's this rigor was being pushed by the traders who were passing global books around the world and if not an issue for the regulators that books and records has to be maintained centrally (in some cases in the country even), the risk and cash management exposure control on mark-to-markets forced firms to keep these separate but coordinated books synchronized continuously.

We see this issue heavily in the work that we do for some of the larger alternative investment firms that we work with at C&A Consulting - a focus to put up better techology but lagging in their discipline to mount the mirror effort of performing the operational data management and governance efforts to keep the data clean, reconciled and accurate.  It's very tedious and there is virtually only downside in the job so its thankless inside a lot of organizations.  With the movement to outsource the fund accounting and third party admin work to paid parties, it is getting some attention but it's still the age-old key to maintaining this "novel concept of an IBOR" - here we are, we're "back to the future".......
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