Our Insights

Who's minding the middle office?

A new middle office emerges

The demands placed on today's middle office are greater than ever: increased regulatory requirements, daily performance returns, closely monitored enterprise risk, new client reporting challenges, and a greater focus on insights and analytics. Adding to this, the middle office must also support an increasingly complex set of financial instruments, an increasing flow of unstructured data, and a heightened demand for data governance and quality.

Key insights

  • The “new middle office” is transforming from a pass-through of data into a mechanism that provides asset managers with greater transparency, actionable information, and rich insights
  • The middle office is now increasingly seen as the guardian of a firm's important data and where much of its potential value is stored
  • The best asset servicers in this new environment will be those that provide multi-provider, multi-service, and multi-channel solutions

The rich data coming out of the middle office is no longer simply a by-product of the investment process. In many respects, it is the investment process. Welcome to the new middle office—the central hub of every asset manager's entire data stack.

This critical role represents a dramatic evolution from the middle office's early history. Traditionally the middle office was cast in a support role, assisting the front office with trade matching and portfolio management. Those core functions remain, but regulation and the increasing complexity of markets mean that middle office functions now encompass support for the full gamut of asset management activities, including portfolio management trading and strategy decisions, market research, risk analysis, pre-trade compliance, collateral management, revenue generation, and client reporting.

“This is an exceptionally rich data set that can add real value to a portfolio's performance and ensure investments are being managed as efficiently as possible,” said Paul Stillabower, Global Head of Product Management at RBC Investor & Treasury Services. “It's not just about trade matching. Asset managers are thinking beyond commoditized activities and are now focusing on the data that comes out of the middle office and how it can be mined for patterns and trends than can inform decisions and enhance the entire investment process.”

Amid unprecedented pressures, an opportunity

As the middle office has evolved from a simple set of tasks to a rich and valuable repository of data, control of the middle office has also shifted. Whereas the middle office—given its complexity and proximity to clients—was formerly seen as the exclusive domain of the asset manager, it is now considered a set of business functions that can be outsourced to enhance operational efficiency and improve capabilities. Challenging market conditions, the shift from active to passive investing, the burden of post-crisis regulation, and the ballooning costs of running the middle office have all added to this shift—from minding the middle office in-house to seeking solutions with an external provider.

This is an exceptionally rich data set that can add real value to a portfolio's performance

To date, middle office servicing has mostly been a lift and shift industry. Asset servicers would simply take control of whatever middle office system already existed and run it as the asset manager had. Technologies grew old and were not necessarily replaced and the middle office became a place of disinvestment.

The industry has come of age now and said: that approach is not good enough. “Asset managers want trade and lifecycle management, they want management of all their security reference data and vendor relationships, they want deep insight into their data and the characteristics of their investments,” said Stillabower. Above all, they want actionable insights that can help understand risks and expose opportunities within their portfolios.

From portfolio health to operational health

Asset managers want actionable insights that can help understand risks and expose opportunities within their portfolios

A useful way to think about the shift from the old “lift-out” model of middle office outsourcing to today's more dynamic asset servicing ecosystem is through the concepts of portfolio health and operational health. Typically, asset servicers will provide managers with an investment book of record (IBOR). The IBOR is a near-real-time investment view of a client's position and investable cash, used by investment managers to make front-office trading decisions. The middle office provides scope of delivery, end of day and intraday views of IBOR data—a real-time, continuously updated snapshot of the asset manager's investment performance or “portfolio health.”

An asset manager's “operational health,” however, is just as important. The simple execution and performance of trades is not the full story when it comes to assessing the health of an asset manager; indeed, it is often after trades are executed that risks of operational leakage arise.

Historically little attention has been paid to such issues, but increasingly it is to these broader, more complex questions of operational health that asset managers must give their closest attention. A good asset servicer will have the tools and services to provide an overview of all aspects of portfolio and operational health, while exposing actionable insights on the basis of the data.

Questions for asset managers to consider

Investment managers should consider the following questions in assessing overall operational health:

  • Do we have idle cash that can be managed more efficiently?
  • Do we have failing trades?
  • If FX is being given to a third party to execute, is it being executed at the best price?
  • Are we encountering difficulties with margin and collateral or with counterparties more generally? In other words, are our investments operationally maximized and efficient?

Toward the middle office of the future

The optimal outsourced middle office solutions of today are scalable, global, technologically flexible, and modular. These solutions are about data visualization connectivity, aggregation, transfer, and quality, as well as contemporary, intuitive, and networked applications built to leverage the necessary data.

The optimal outsourced middle office solutions of today are scalable, global, technologically flexible, and modular

Helping clients manage and recalibrate their systems in response to changing market conditions and business needs is the central challenge for asset servicers. The truly modular middle office has the strength and flexibility to evolve in response to changing conditions and support wherever asset managers go—into new asset classes, across rebalancing and shifts in portfolio strategy and complexity, through mergers and acquisitions (M&A) activity, changes in corporate control, and mergers of different operational models—whenever they go there. “The ability to evolve with the manager and manage the interoperability between back, middle, and front offices is critical,” said Stillabower.

Middle-office operations will not be optimized by one solution alone. The middle office of the future will be a scalable and agile unit with the flexibility to shift gears as different components of the data stack fluctuate in importance to the overall business. The asset servicers that will prosper in this new environment will be those proactively exploring and investing in new technologies—advanced analytics and AI especially—even as they continue to provide best-of-breed intelligence into existing investment and operational data. “The best asset servicers will provide solutions that are multi-provider, multi-service, and multi-channel,” concluded Stillabower.


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