Middle Office to Be the New Powerhouse of the Buy Side, Says DST International

8 December 2008

A White Paper from DST International (DSTi), a global provider of market leading investment management solutions, argues that the new order emerging from recent market turmoil presents an opportunity for the middle office to take centre stage in asset management firms. The key driver for this is the continuing need to seek alpha from OTC derivatives.

A November 2008 report from The Bank for International Settlements highlights this trend, showing that notional amounts of outstanding OTC derivatives increased in the first six months of the year by 15% compared to the previous six months. Interest rate products grew by 17% and commodity derivatives by 56%.

History suggests that firms face a far greater risk from systems failing to cope with complexity than from poor investment decisions or the actions of rogue traders. Yet the handling of OTC derivatives - which demands automation, simplification and control - is often managed by a mishmash of systems fed by data from disparate sources. Indeed 50% of OTC derivatives are still processed manually. Emerging awareness of the operational risks associated with OTC derivatives, coupled with increasing volumes will drive growth in IT spend.

Chris Sier, Director, Alpha Financial Markets Consulting (Alpha FMC) says, "Between 2006-2007, IT spend on the derivative middle office by Alpha FMC's Asset Manager benchmarking clients increased by over 70%.
Early indications from our 2008 data show that this trend has continued and we expect this to carry on in 2009."

As Steve Cheng, Head of Solution - Investment Control at DSTi says, "The middle office is well placed to offer a consolidated view of a firm's financial dynamics. This is more important than ever today. Yet the lack of automation in processing OTC derivatives makes it a real challenge. A 'community' approach from the industry will accelerate progress and establish standards simultaneously."

The DST International Paper calls for a collaborative approach from investment management firms, systems vendors and their partners. If the industry achieves common standards for OTC derivatives, particularly in the area of data, then the door is open for an 'ideal' middle office approach to these instruments that is centred on the contract.

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