Multi-Asset Class Trading: Easy to Execute, Hard to Process
October 11, 2010
Electronic tools have made multi-asset class trading a reality for envelope-pushing asset managers.
Now comes the hard part: How to process trades in middle and back offices, which until recently have tackled only equities and fixed-income products.
The answers: Either rely on a new cottage industry of middle- and back-office products which claim to offer multi-asset class capabilities, build proprietary systems or in some cases integrate specialist systems into technology infrastructure.
"The general consensus among vendors is that a market turnaround is expected in 2011, likely kicking off requests for proposals in the second half of 2011," said Denise Valentine, a senior analyst with Aite Group, a Boston-based research firm.
Fund managers can take advantage of order management, execution and smart-order routing systems to send orders in different products or different legs of a cross-asset transaction simultaneously to multiple counterparties and multiple trading venues. Execution management systems often couple centralized trade and execution management with real-time analytics so that an institution can monitor risk, profit and loss (P&L) and compliance across multiple assets, all day long.
There are traders who "trade an equities portfolio while hedging their currency exposure," explained Ary Khatchikian, president and co-founder of Portware, a New York-based provider of electronic trading technology. "The added value isn't simply the ability to trade more than one asset class. The ability to conduct all other trade functions-analytics, risk, algorithmic trading-and access broker-specific functionality through a single platform, all in real time, is where the real value of a centralized system comes in to play."
However, fund managers may not be prepared for the recordkeeping, valuation and rest of the processing work involved. "For years, asset managers tried to get by with systems designed strictly for equity and fixed-income transactions, and that means they could not produce consolidated reports of positions or exposures because they were losing a lot of the underlying attributes of the trade or the trade was booked incorrectly," said Pamela Pecs Cytron, chief executive officer of portfolio management software firm Pendo Systems.
Pendo Systems' BasisPoint allows the fund manager to take a transaction and break it down into the tax-lot level and store it into a transactional database. "The financial instrument will not be pegged into a particular asset class but identified by its attributes," said Pecs Cytron. "Doing so allows the fund manager to more correctly measure its exposure to a particular firm, industry sector and counterparty."
Other new and advanced multi-asset class portfolio management systems can also provide an array of advanced risk analysis such as risk factor sensitivities, Value at Risk calculations, back-testing of algorithms and stress testing of economic circumstances. The systems also can handle valuation modeling for not only equities and fixed-income instruments but over-the-counter derivatives as well.
Valentine cites Calypso, Murex, Sophis, OpenLink and SimCorp as offering the strongest combined portfolio management and accounting capabilities.
But are so-called multi-asset class products really a panacea? One IT director at a New York investment management firm, who declined to be named, said no, not across all of the products his firm wanted to trade. "Each of those multi-asset class systems has an expertise in a particular asset-class because of its origins before it expanded into other product ranges," said the technology director.
That expertise relates to the sophistication of the data models used to capture the attributes of each financial instrument and any other data required for accounting, risk metrics and reconciliation His answer: Spend two years developing a proprietary portfolio management platform with Java-based architecture.
Many fund managers also question just how well multi-asset class systems can value so-called semi- or illiquid financial instruments such as bespoke over-the-counter derivative contracts. As a result, some are turning to specialist firms such as SuperDerivatives and Markit.
In June, SuperDerivatives launched a web-based interactive application which allows fund managers can analyze the pricing assumptions of individual trades and do stress testing of large portfolios.
Perhaps the most difficult challenge fund managers face when trading so many diverse asset classes is how they will handle collateral management.
"Although portfolio management and accounting systems can often handle multiple types of financial instruments, middle-office systems do not," said Tim Lind, managing director of strategic planning for Omgeo, a post-trade services provider.
The problem becomes even worse in a multi-leg transactions where each part of the trade is booked in a different system. Fund managers who don't want to rely on spreadsheets can use MarkitSERV and TriOptima to reconcile positions on over-the-counter derivatives with broker-dealer counterparties and calculate just how much margin managers must post.
But those platforms cannot measure the total exposure to each counterparty and collateral owed or received for all collateralized transactions. That means that fund managers have to aggregate data from multiple collateral management platforms or a combination of platforms and spreadsheets-an often error-prone process.
Sophis and Omgeo can do so, and SunGard is now working on creating an enterprise-wide view of collateral for fund managers by integrating its securities finance and over-the-counter derivative systems.