- Past issues - 2010
- Past issues - 2009
- November 2009 - More With Less
- September 2009 - Get a Grip on Market Data Costs
- July 2009 - IT Cost Management: Preparing for 2010
- June 2009 - Mergers and Acquisitions: Now What?
- May 2009 - Fixed Income Systems: Challenges and Opportunities
- April 2009 - The Current State of Trading Technology
- March 2009 - The Outsourcing Option: Is the Time Right?
- January 2009 - Riding A Tiger: When Risk Becomes Reality
- Past issues - 2008
- Past issues - 2007
- Past issues - 2006
CutterAdvantEdge
Issue 67, May 2009
Fixed Income Systems: Challenges and Opportunities
The historic market volatility and dislocations of 2008 are bleeding into 2009 and continuing to challenge financial institutions worldwide. The contagion is forcing a retrenchment in balance sheets and risk taking, and few firms have found a place to hide amid the storm. Expected to emerge from the turmoil are a reconstructed global financial architecture and a more invasive regulatory environment—though the process will take years to play out.
We are in an era of back-to-basics; keeping an eye on the swells close-by and not peering off too far into the horizon. To remain viable, fixed income professionals agree that they must have powerful analytical tools to help them evaluate and compare investments. Consequently, firms are wary of disruptions in support systems that may affect their ability to succeed. Yet shrinking budgets have firms facing a challenging dilemma—how to reduce costs while retaining sophisticated systems that provide competitive advantage. Balancing need against cost is compelling firms to re-evaluate which systems most effectively provide the level of functionality required to manage their portfolios during changing market conditions. Navigating through the turmoil while providing a rich platform for fixed income management will continue to be formidable in the near future. Fortunately, market demand generates innovation and more robust and comprehensive software solutions are increasingly available.
Navigating the Turmoil
As would be expected, the market turmoil of the last six months and the instability of counterparty entities have buy-side firms worried. Counterparty risk is no longer confined to trading relations; it has evolved to include disaster recovery should a primary partner in their systems architecture suddenly evaporate.
The buy-side’s reliance on sell-side solutions for managing their fixed income portfolios has exacerbated an already challenging situation. Combined with the dramatic reduction in assets under management, strained budgets, and nervous staff, buy-side organizations are actively re-evaluating their investment technology spending to reduce costs but also immunize themselves from future market and counterparty turmoil.
As a result, CutterResearch member firms have moved from “the business gets whatever they want” to a “do more with less” environment. Although the markets have slowed relative to innovation in new instruments, the trading volume and complexity of existing instruments has not abated. This complexity of fixed income markets and the instruments traded continues to require some level of specialization. This specialization affects roles and responsibilities within the firm, the types of data that must be gathered or calculated to effectively assess the risk/return attributes of investments, and ultimately, the systems that can support the different assets types and instruments.
The new focus has firms experiencing the Goldilocks Syndrome—searching for the perfect fit of financial technology software and services to support investment teams. Historically, the highly visible, ubiquitous sell-side firms offered depth and breadth of inventory in their area of expertise, and state-of-the art technology to complement managing and understanding those assets. As fixed income managers diversified their portfolios, the number of solutions they relied on to make insightful investment decisions proliferated. These “free” platforms developed into a feeding frenzy. In return, the sell-side provider expected buy-side trade flow. Despite the new bundling and commission transparency rules, the sell side has continued to be a popular source of systems for buy-side organizations. Today, the majority of diversified fixed income shops have in excess of three sell-side or pure play financial technology solutions in production to support their portfolio management decision process. The result is a fixed income portfolio management platform characterized by a complex web of specialist systems and data providers.
Looking to the Horizon
The need to refocus on critical systems for portfolio management is complicated by the changing landscape of available solutions. The historically distinct differences between suppliers of fixed income portfolio management solutions are blurring. The sell-side providers are more actively charging for their solutions as they evolve from cost centers into hard-currency profit centers. As a result, firms are interested in assessing their sell-side solutions and comparing these solutions to the range of other providers. Today, systems that offer robust fixed income portfolio management capabilities are offered by not only the sell-side, but also the buy-side, from pure-play software firms and Order Management System (OMS) vendors.
With senior management continuing to press their organizations to find the most efficient solution whether from one vendor or several—IT teams are concentrating efforts on understanding the value proposition of each vendor.
Join CutterResearch in our discussion of Fixed Income Portfolio Management Solutions on May 19 in London or June 2 in New York, to hear the results of our findings on fixed income portfolio management systems and share how other members are tackling the complex architecture and practices concerning this discipline.