The prospect of remote working becoming the “new normal” amid the likelihood of renewed Covid-19 lockdowns is driving investment managers of all sizes and strategies to re-evaluate their operational infrastructure and business practices in light of this year’s unprecedented events, according to SEI Investment Manager Services.
A recent SEI white paper, ‘Remote Working, Covid-19 and Middle Office Outsourcing’, explores in detail the ways in which the historic market volatility and continued workplace interruptions brought about by coronavirus has upended up asset managements’ back- and middle-office ops arrangements.
In particular, the study noted how those firms with pre-existing service provider partnerships were generally better-placed to adapt to remote working, and successfully handle the increases in transaction and call volumes during the initial stages of the coronavirus lockdown.
“The success of middle-office outsourcing relationships during this crisis has prompted many firms to consider how such a partnership can help insulate them from unexpected volume spikes, future lockdowns and increasing economic volatility,” the paper observed.
“With black swan events happening more frequently, many firms are forced to prepare for such scenarios to reoccur.”
Costs and considerations
While financial services firms are required by FINRA to have business continuity plans in place in the event of emergencies or significant business disruptions, these have tended to be short-term responses to temporary issues, such as electrical outages, fires, flooding and weather disasters.
In contrast, the coronavirus disruption went from weeks into months, with events shining a light on the benefits of having an outsourced service provider installed on a more permanent basis, SEI said.
Despite the prominent trend of asset management software moving to a SaaS or cloud-based applications, SEI pointed to a “sizeable share” of firms’ technology teams still running certain elements of their data and software on-site. Throughout the Covid-19 pandemic, many such teams have had to balance continued office access with adhering to “cumbersome” social distancing rules.
In contrast, asset managers with outsourced operations teams have been able to adapt more quickly to a remote working environment, the paper noted.
It also touched on how firms are developing reopening strategies, and are weighing up the costs and benefits of reconfiguring their offices to allow for social distancing, having earlier redesigned their technology and operations workspaces to help promote close proximity collaboration.
“The added real estate and construction costs of such a project alone may drive consideration of outsourced operations,” SEI said.
A unique advantage
During March’s volatility spike, global custodians reported a surge in the volume of back-office transactions compared to the first two months of 2020. Similarly, SEI saw a doubling of middle-office transaction volumes in March compared with the January/February average.
The unprecedented market movements brought increased trading volumes, unscheduled cash flows, large valuation changes and concurrent swings in collateral requirements, requiring operations teams to be “alert, nimble and, in some cases, on double duty” to ensure timely and accurate processing of cash and assets transactions.
But trading volumes and corresponding liquidity needs were not the only operational segments under high-risk conditions, SEI noted, with huge market swings demanding ever-closer monitoring of collateral requirements. The paper estimated that the typical one or two collateral calls per week may have increased to several calls a day by mid-to-late March.
SEI suggested investment managers which use a third-party service provider to handle trade confirmation, settlement and collateral management were at a “unique advantage” in dealing with volatility spikes, and better placed to avoid “costly financial errors and procedural violations.”
“Service providers are well-suited to handle these activity spikes with global staff that supports multiple asset managers and thousands of accounts across markets, counterparties and custodians,” SEI said in the paper, highlighting the opportunities to reassign and reallocate resources across the organisation and between firms.
“During a time of extraordinary strain on operations, asset managers with outsourced middle-office support were able to better maintain stability and mitigate risk.”
A compelling argument
SEI believes that the broad mix of challenges arising from the coronavirus pandemic demonstrate the “a compelling argument” for outsourcing.
Outsourcing allows asset managers to concentrate on their core business, SEI said, while allowing a service provider to run the range of operations activities – accounting, reconciliation, collateral management, settlement systems and technology functions - which otherwise would require “significant oversight” if managed internally as a cost centre.
At the same time, a middle-office partner will also maintain links to external counterparties, data providers and clients, and oversee the hiring and training of ops and tech professionals who can then be cross-trained and reallocated during peak times. Service providers will also maintain and upgrade the running of technology infrastructure at the firm.
“Moving to a service provider model with a variable fee schedule that will contract if AUM or the number of accounts decrease can be appealing to protect costs during a downturn,” SEI added.
“During a business disruption, having a service provider for investment operations lessens the burden on the asset manager, who can focus on the challenges of continuing portfolio and risk management and managing client relationships while the service provider handles the operational activities and data generation.”
Why not now?
Ultimately, SEI contends that having service providers onboard guarantees human and technical support for investment operations, while also taking on the burden and risk of timely trade operations, collateral and cash management, and ensuring the provision of accurate data.
“As the remote working environment becomes the new normal, sophisticated growth-oriented managers currently employing an in-house operations model need to re-evaluate their operational infrastructure and take advantage of the learnings of the past few months,” the white paper said.
“The days of 100 per cent of staff being on-site in urban offices may never be the norm again. Those who think, ‘Why not now?’ instead of those wishing to return to the days of old, will have a leg up on those who wait.”
SEI's latest middle office whitepaper, "Remote Working, COVID-19 and Middle Office Outsourcing," explores some of the operations challenges and opportunities in our industry, including:
- Challenges adapting to a remote operation
- Mitigating risk through outsourced operations
- Meeting the demands of market volatility
- Outsourcing and transition planning