Maximising the middle
Historically, many asset managers in Asia-Pacific have seen the middle office – which includes complex, knowledge-intensive activities such as performance reporting, fund accounting and data management – as an inescapable expense drain requiring constant IT upgrades, while adding little to business performance. This perception is changing.
By outsourcing the functions to a specialist external provider, asset managers in Europe, and increasingly across Asia-Pacific, are discovering that a well-managed middle office can add real value to their organisation. Instead of holding all the complexity, operational risk and fixed costs in-house, partnering with an asset servicing provider can help companies adapt smoothly to regulatory change, take advantage of technological innovations, and actively facilitate the front office’s objectives.
Middle office outsourcing deals are becoming increasingly prevalent in Asia-Pacific as both client and provider models have matured. For asset managers, the attractions are well-proven and multifaceted.
With growing size and maturity comes increasing operational complexity and cost. By outsourcing, asset managers can transform that heavy internal fixed cost burden into a variable cost, and be better positioned to cope with industry fee compression trends.
A swathe of new regulation has come into effect in recent years, and more changes loom on the horizon. The onerous task of complying with these shifting rules falls largely on the middle office, which may have to develop new expertise, infrastructures and processes to cope. Meeting the global OTC derivatives reforms – in particular fulfilling the trade repository reporting requirements – is one of many major challenges.
Supporting this mass of regulatory initiatives will be extremely costly, difficult and time consuming for in-house teams and will detract focus from the firm’s strategic goals. And regulations vary from market to market: whereas in Europe there are some common regulatory processes, in Asia-Pacific significant legal and regulatory differences exist between each country. Asset managers seeking to expand their geographic reach therefore face an exponential increase in the complexity of their middle office set-up. As a result, there is a clear incentive to leverage the expertise of providers who have the necessary skillsets, processes and experience, and thereby alleviate the burden.
As well as moving into new territories, many Asia-Pacific asset managers are keen to exploit opportunities to expand into different asset classes and instruments. But while they might have the front office product expertise, they may lack the middle and back office capabilities to support the operational complexity such moves introduce.
Repos are a notable example. The global push towards increased clearing is forcing market participants to source more collateral. One solution is to use repos. However, many firms lack the middle and back office familiarity to properly process the transactions, so they are turning to external providers with readily available, cost-effective solutions.
Middle office processes have become so complex and specialised that it requires considerable time and investment to keep up with ever-changing best practices. Sophisticated internal solutions need continual updating, as well as access to the right market infrastructures, membership of industry groups and knowledge of market standards to keep pace with evolving procedures.
Some asset servicing providers have developed sophisticated middle office products and cutting-edge IT platforms that directly address the growing market complexity and shifting regulatory environment.
For example, recent advances in data visualisation technology enable specialised middle office providers to go far beyond providing the basic account reports that asset managers are used to, but which add little value. This gives asset managers interactive, customisable data tools that cut through complexity, expose anomalies and inform decision-making. Such tools even allow scenario testing, helping asset managers to improve distribution and allocation strategies based on real-time funds data.
The middle office can be so much more than an operational deadweight. With the right partnerships, it can become a powerful tool that enables asset managers to manage complexity, handle change and grow their business.
Read this article as it appeared in Quintessence magazine (Winter 2016)
"Maximising the middle"