Asset Managers of all stripes are pursuing the opportunity to outsource all or part of their operations to qualified service providers. The reasons vary, but hedge funds, pension companies, corporate treasuries and insurers are looking at outsourcing post-trade activities. Nowhere is this more prevalent than with OTC derivatives instruments.
The factors each asset manager considers when determining which processes to outsource are as varied as the mangers themselves. But common rationales can be summarized, if only for convenience.
- Asset managers are looking for efficient ways to take advantage of industry technology such as automated trade matching, messaging and cash transaction processes.
- The regulatory enhanced drive toward derivatives clearing requires retooling technologies. Outsourcing allows managers to lay off the expense to providers who can focus their technology efforts efficiently for the benefit of all their clients.
- Hedge funds specifically, find it easier to allocate costs directly back to the funds they manage if they outsource the process to a service provider.
- Cost effective scalability in a market where the need for enhanced returns may require the flexibility of trading larger numbers and varieties of OTC derivatives.
- As traders find value in increasing the number of dealer, prime broker, and custodial relationships, outsourcing can take advantage of service providers established relationships with sell-side back offices and the connectivity already in place.
- Similarly, the increased complexity of the new ISDA Credit Support Agreements with multicurrency cash settlement and segregation of initial and variation margin, and cleared and un-cleared collateral payments are driving managers to consider outsourcing collateral management.
- For some asset managers, OTC derivative trading is an important function, but not a primary one. For these managers choosing to outsource can allow key personnel to focus on the most important aspects of their business. This can be true for hedge fund managers as well as for corporate treasurers, etc.
- Adherence to evolving best practices can be assured by when outsourcing to providers that stake their future on keeping up with advances in processes and that certify their controls through SOC I (Statement of Controls) audits.
- The need to respond to increasingly demanding regulatory reporting requirements such as Form PF, ADV, CFTC, Solvency II.
- Pressures to provide transparency and independent verification of asset existence and valuation required by institutional investors and regulators.
- A desire for independent risk measurement and limits monitoring.
- Increased scrutiny is compelling boards of directors, Chief Risk Officers and other governing bodies to require more transparency to fulfill their fiduciary responsibilities.
Whatever the reasons that motivate the decisions of individual asset managers, the trend is unmistakeable and shows no sign of abating anytime soon.