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Tips for striking the right balance in investment ops

May 20, 2011

Striking a balanceThe mandate for today’s investment operations teams has 3 components:

  • Operate efficiently and
  • Provide a high level of client service and
  • Provide 24/7 coverage around the globe.

Speakers at NICSA’s third Investment Operations Seminar, held yesterday in Boston, talked about how they strike the right balance among these often competing objectives.

They emphasized that the biggest challenge they face is complexity, arising from several sources. Securities and transactions are increasing complex: a representative from one mutual fund manager estimated that 50% of corporate actions now involve some sort of unique feature, involving special handling. Processes are increasingly complex: that same firm deals with 45 different custody banks. And organizations are increasingly complex: for example, the speaker from State Street noted that more than half of staff is now based outside the United States.

Their tips on how to find the right balance:

1. Invest in technology, even in the lean times. Technology is the way to keep track of regulatory requirements that differ across jurisdictions — such as the disclosures that appear on trade confirmations — requirements that often change over time. Using technology wisely can give staff time to focus on value-added functions, such as analyzing the tax implications of transactions, rather than routine processing.

But panelists noted that using technology adds its own complexity,  because the technology itself is constantly changing. For instance, the messaging standard for corporate actions is transitioning to ISO 20022 — which means firms that have already built systems around the ISO 15022 standard may find themselves using resources to solve the same problem twice.

2. Tap into your networks. Draw on all the information available to you — from regional offices within your firm and from your service providers Striking a balance (2)— to stay on top of local requirements and regulatory developments. One firm gives its local office veto power over any proposed project, recognizing that those with local knowledge are best-placed to evaluate the practicality of any idea. One panelist also mentioned the value of being involved with industry associations, which can give you access to information about “best of breed”.

3. Tackle problems at the source. In the short term, firms usually solve problems by adding staff and technology in-house, but in the long-run it’s most efficient to address the root cause. That’s the approach that DTCC, SWIFT and XBRL are taking to simplify corporate action processing. They’re asking issuers to provide more complete information sooner, using proven technologies. You can read more about their “Issuer to Investor” initiative here.

4. Make vendor oversight a priority. Spend as much time thinking about how you will monitor vendor performance as you do about vendor selection. Have a team dedicated to oversight of each function. As one panelist noted, “You can outsource the function, but you can’t outsource the risk.”

5. Match the function to location. Take advantage of time zones, to speed up information availability and make work hours more reasonable. For example, calculation of cash availability — which needs to be done overnight — might best be performed offshore. Move more routine functions to lower-cost locations. Keep more complex functions — including all direct client service — local, even if that’s higher-cost. Keynote speaker Robert Smuk, North America Operations Head, Securities and Fund Services, Citi, suggests that the ideal mix might look something like this:

60% commonware low-cost location
30% configurable mid-cost location
10% custom high-cost location

What tips do you have for striking the right balance?
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