Factors to consider before outsourcing Post-Trade Processing

The high costs of IT infrastructure and cybersecurity

Creating, maintaining and managing the IT infrastructure related to post-trade processing can be both expensive and burdensome, particularly for smaller firms. On top of the information technology costs, there are staffing costs for both IT and back-office professionals. The complexity of the regulatory environment also has a profound impact, and as regulatory requirements evolve, legacy systems must be adapted for compliance. These costs can add up quickly.

 

Hedge funds and investment managers are also experiencing an increase in cybercrime, and targeted attacks by hackers are a serious concern. Particularly for smaller firms, the responsibility to protect the integrity of client information and ensure network security is a major concern and a significant burden. By outsourcing, firms can address cybersecurity risk and comply with regulatory safeguards while also reducing infrastructure and processing costs.

 

Increased focus on the core business

For firms that bear all the costs of post-trade processing, including those of IT and staffing, it’s important to consider the value-added. An investment manager or hedge fund differentiates based on the quality of its strategies and its ability to generate consistent returns. As long as funds avoid costly mistakes in the post-trade process, investors will continue to focus on what matters to them – investment results. Consequently, it makes sense to focus on the core business and the factors that differentiate a fund from its competitors.

 

What to look for in an outsourced solution

Beyond reputation and cost, what are the factors that funds should consider when looking for an outsourced post-trade solution? Importantly, the solution should have the ability to effectively gather, scrub, normalize, consolidate and distribute reference data. The effective management and consolidation of data from different sources is critical, and it’s vital to have the scope to scale for future growth. As a firm evolves, you’ll need the capacity to add accounts and new investors, as well as establish multiple prime brokerage and clearing brokerage relationships. When considering any solution, it’s necessary to consider all the ways your firm could evolve in the future to avoid limiting yourself.

 

Firms also need to ensure that the solution chosen has the functionality to switch between looking at overall risk as an investor and the individual risk profiles of multiple traders and investment managers. Moreover, needs can vary by investment strategy. For example, a global macro fund might require a relatively simple risk reporting methodology such as Parametric VaR, while a relative value trader would find greater benefit from a Monte Carlo simulation. For large funds with multiple managers, the ability to allocate costs to particular funds is also a significant consideration.

 

Conclusion

Solutions exist to meet every need, and provided you invest to understand not only today’s requirements, but tomorrow’s, it’s possible to find an outsourcing option to fit every firm. Vital to remember though, is that ultimately regulatory compliance is your responsibility. Therefore, it pays to do your research and choose a reputable partner who will meet your needs and help you mitigate risk.

 

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About the Author

Rebecca Baldridge, CFA, is an investment professional and financial writer with more than 20 years of experience in creating content and research for asset managers, investment banks, brokers and other financial services clients. She’s worked for some of the biggest names in the industry, including Merrill Lynch Asset Management, JP Morgan Asset Management, BNY Mellon and Franklin Templeton. Rebecca also spent 9 years as an analyst and director of equity research in Moscow, working for several Russian banks. In late 2019, she founded Quartet Communications, a boutique communications firm serving financial services clients. Her writing has been published in outlets including Pensions & Investments, MSNBC.com, Inc. magazine, and Investopedia.com. She holds a B.A. in Russian from Purdue University and an M.S. in Finance from the Krannert Graduate School of Management at Purdue.

 

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