IBOR: Navigating the Options for a Dream Position Engine

As fund managers struggle to increase their investment returns, reduce their costs, and satisfy growing regulatory demands they are quickly embracing an old concept — data management — albeit with a new twist.

Implementing the so-called investment book of record, or IBOR for short, has become a de facto requirement for fund managers who need intraday, if not near-real-time knowledge of just what they own, how much it is worth, and how they should be balancing market and counterparty risks on the one hand with performance metrics on the other.

IBOR isn’t exactly a new idea, five fund management operations and software specialists at recent TSAM North America gathering told FinOps Report. What is new, they explained, is a clearer understanding of just what it means, what tasks it should cover, and even the different technological approaches to implementing the idea. “There is a growing consensus around the definition of IBOR as well as its functional importance to the investment management process in the context of current market conditions and industry drivers,” said Jeremy Hurwitz, president of Los Angeles headquartered buy-side technology consultancy InvestTech Systems Consulting, who addressed IBOR during a panel discussion at the TSAM event held in downtown Brooklyn, New York.

Fund management firms have historically relied heavily on the separation between the trading book of record (TBOR) and the accounting book of record (ABOR) — or what is stored in back-office systems –to get a glimpse of all of their open and closed positions. “While that vision certainly goes a long way to helping portfolio directors broadly understand their holdings, it doesn’t provide the most up-to-date information on the balance between risk and reward,” said Maan Bsat director of solutions for the Americas at software firm Misys. “It doesn’t include changes to positions resulting from corporate actions such as dividends, income payments and reorganizations of issuers. And it doesn’t allow for any risk metrics which could shape future investment decisions.”

IBOR versus ABOR

IBOR takes the concept of ABOR  one step further by adding a whole array of necessary data from other middle-office systems. The result for all business lines is a more useful and up-to-date picture of just how well a portfolio is faring at any given moment in time. By contrast, ABOR typically relies on an end-of-day snapshot, which cannot satisfy either front office or even back-office needs. Investment decisions inevitably become marred based on an incomplete view of all positions and investable cash. New regulations have also introduced intensive and frequent reporting requirements, which at their core all require more efficient data managment.

“With dynamic portfolio updates and up-to-the-minute info in IBOR, fund managers can better respond to ad hoc client reporting requests and fulfill reporting requirements such as the US Securities and Exchange Commission’s Form PF, the Commodity Futures Trading Commission’s Form CPO-PQR, and the European Commission’s AIFMD Annex IV,” said Jane Stabile, president of fund management consultancy IMP Consulting in Boston.

As a separate book of record from the accounting system, IBOR has the ability to properly capture information on securities that a legacy system may not be able to handle well.” Case in point: because many firms select the best-in-class order management system for a specific asset category, they do manual workarounds — or tinker with the platform –to incorporate other asset classes — namely real-estate holdings or even derivatives.

Just what functions should IBOR incorporate? It depends on who one asks. Last month the London-based Investment Management Association (IMA), the trade group representing the crème de la crème of the City of London’s fund management community, came out with a guidepost of basic tasks IBOR should encompass and a list of wannabe or so-called “frontier” ones. With the primary function designed to deliver high quality position data in a timely fashion to multiple applications, the ability to project and capture events which impact positions is critical, said the IMA’s IBOR Standards Group, whose members include M&G Investment Management, Legal & General Investment Management, JP Morgan Asset Management, The Vanguard Group, Hermes Fund Managers, and Ignes Asset Management. Frontier capabilities outlined in the IMA’s white paper include pricing and portfolio valuations, commission charges and transactional tax calculations.

Who Needs It?

Yet as the buy-side community sets aside its competitive nature in favor of promoting standard practice, two tough questions rise. Does every fund manager need IBOR? And for those who need it, how is it be implemented?. “IBOR may not be a necessary for all fund managers,” said Mark Israel, vice president for global financial consultancy Sapient Global Markets in Boston.” As a rule of thumb, the greater the number of front-office trading platforms and back-office systems handling multiple asset classes, the greater the need for IBOR.”  There is just too much data held in disparate systems which cannot be quickly updated and synchronized, often leading to missed investment opportunities.

Half of the ten fund management operations specialists who spoke with FinOps at the TSAM event said that their firms were either in the process of implementing IBOR or considering it. “The topic is high on the agenda of our C-level executives, and it’s just a matter of figuring out how we will accomplish it,” said one operations manager.

Investment management shops can’t necessarily achieve IBOR by simply consolidating the data from multiple front and back office systems into a single be-all-end-all platform, warned Hurwitz. “That scenario belies reality because it implies there is a single operational investment platform that is fully integrated while also being best of breed, and which can accommodate all functions across all asset classes,” he said.

A number of software firms may claim to offer end-to-end capabilities for all asset classes, but that may not be the most practical solution for the many fund managers relying on multiple bespoke platforms, who can’t justify the massive reengineering necessary to achieve IBOR as a magic bullet. Hence, finding a more cost effective means of implementing IBOR, by leveraging the existing assets of a multitude of systems, becomes a necessary evil, according to Hurwitz.

Three architectural models, each with its own benefits and shortcomings have emerged. One is to rely on a front-office order management system, and the other two depend on leveraging back-office systems through either a data warehouse or enterprise service bus. While it may make sense to rely on a front-end system familiar to portfolio managers and traders, this approach will require one system to be the master by having access to all trades and positions. Even the best system might not be able to accommodate all asset classes equally, explained Israel.

A data warehouse, in turn, would allow for a single location to store and access trade, market and client data, but it needs both information on real-time trades and an operational data store to update information quickly enough. An enterprise bus would allow all systems to have quick access to data at the same time, but implementation can be time-consuming and costly unless phased-in properly.

An ideal answer, said Israel: combine a service bus for real-time information and integration, an operational data store for real-time position-keeping and a warehouse with transactions, security master and positions that allows for historical views. Such a scenario provides not just the basis for achieving the basics of IBOR, but also the ability to implement with progressive iterations to control project risk and add on frontier capabilities.

Just who should make the call? With IBOR’s main benefactor being portfolio management and risk analytics, it will most likely fall on the shoulders of the chief investment officer or even the head of investment operations. However, that doesn’t mean they should operate in a vacuum. “As is the case with enterprisewide data management projects, each business line or functional area which has demands of the IBOR platform should be represented,” said Hurwitz.

Tough Choices

Even so, making a final decision could take a lot more than understanding the costs and benefits of each architectural alternative. There are a host of software firms marketing an IBOR strategy. Choices include order management system operator Charles River, as well as end-to-end multi-asset platforms from Misys, Simcorp and Eagle Investment Systems. DST Global Solutions has also just entered the fray with an enhancement to its Anova platform which it says provides an enterprisewide view of continuously updated positions and  valuations as well as the decomposition, forecasting, and historic viewpoints.

Evaluating these options will have to reflect not only what the software offers, but also what the buyer needs. “The critical questions become just what asset classes one wishes to incorporate, which functions are covered, whether the platform allows for real-time updating and data access, and whether it is flexible enough to incorporate additional functions a fund manager may want in the future,” said TSAM panelist Bjorn Schumberg, senior business consultant in New York for investment operations technology specialist SimCorp in North America.

Bsat recommended that fund managers only consider technology vendors that tailor each implementation to bridging the gaps created by the firms’ existing fragmented system architectures. Most organizations’ systems are comprised of many disparate best-of-breed solutions to address specific needs. Data integration becomes a major issue with such systems, which can be very inefficient in communicating with each other. Fund managers also need to plan to enforce top-notch data stewardship if they haven’t done so already, for optimal management of analytics, workflow and reference data. High-quality data aggregated and reconciled correctly can more easily be fed into real-time information analytics and workflow systems.

Although the best results implementing IBOR, said Schumberg, come from using a single integrated front-to-back solution, it is still possible to integrate an IBOR process with other systems. While such an initiative might be viewed as time-consuming and expensive, fund managers should consider the long-term risk and costs of not taking action to ensure constant access to up-to-date data.

Fund managers that outsource their middle- and back-office operations could easily end up with more hurdles in data gathering process than their peers which do the work in-house. “They [outsourcers] will have to go through their service level agreements to understand just when they will receive their reports from external service providers,” said Schumberg. “It is unlikely they will be able to do so in real-time, so they should assess which business functions will need real time data. Having intraday positions at one’s fingertips allows for performance exposure and cash flows to be calculated accurately — the premise of good investment decision-making.”