As the investment book of record (IBOR) comes of age, forward-thinking asset managers are exploring its potential to replicate and validate the calculations of their fund administrator. But standing in firms’ way, quite literally, can be a small matter of time.
In the last few years, the IBOR has become a mainstream means for asset managers to gain a timely, comprehensive view of their positions, incorporating cash and income flow, trade events, corporate actions, subscriptions, redemptions and so on. Its primary use has been to support front-office decision making, by supplying portfolio managers with accurate start-of-day and end-of-day positions across asset classes. Beyond the front office, however, the IBOR has increasingly been used to drive a range of additional, middle-office services that also require traded positions, from performance measurement and portfolio attribution to collateral management and financial reporting.
Now IBOR is facing a new challenge, as firms look to extend its use further to testing the accuracy of their accounting book of record (ABOR). The ABOR supports the firm’s back-office operations, including the critical regular calculation of net asset value (NAV) – and are often maintained by a fund administrator under an outsourcing arrangement. But as regulators look to increase vendor oversight, asset managers are under pressure to put in place their own back-up “shadow” processes for investment accounting and NAV calculation.
With its own complete set of investment data, the IBOR would seem to provide the perfect solution to replicating or validating the ABOR. But there’s a fundamental problem that all comes down to timing. While most IBOR calculations are based on trade date (T+0) valuations, ABOR is typically processed on a T+1 basis – not recognizing trades as part of a fund (and therefore its NAV) until a whole business day after the trade has been executed.
The good news is that technology has now evolved to mitigate the impact of this timing difference, as it is now possible for asset managers to access their own fully integrated IBOR/ABOR capability. As part of this combined solution, the manager’s ABOR can process transactions at the same time as its administrator, but drawing on the same transaction data as its IBOR. With an automated reconciliation routine, it should then be able to replicate, within a reasonable tolerance, the administrator’s output.
Some of the world’s largest asset managers are set to take advantage of this innovation, deploying an integrated IBOR/ABOR globally as a holistic solution for both administrator oversight and IBOR. A number are choosing to deploy a hybrid model – running their own books for record for mature markets, for example, while outsourcing to external providers in emerging markets. While this helps them run internal processes effectively, it also makes it essential to replicate administration processes on a T+0 basis. An integrated IBOR/ABOR provides the ideal solution, allowing asset managers to use the same data for T+0 and T+1 calculations and avoid duplicating and normalizing data offline.
In an investment environment where accuracy is paramount and oversight increasingly required, it is no longer sufficient for asset managers to rely on summary data from their fund administrator to predict NAVs. With its ability to handle both T+0 and T+1 calculations, and shadow administrators more closely than ever before, it’s fair to say that integrated IBOR/ABOR technology couldn’t have arrived at a better time.