Front office outsourcing trading is not a new trend on the buyside, but it is accelerating due to the disruption caused by Covid-19 along with increased competition, fee pressure and regulation, according to a new paper from Northern Trust – From Niche to Norm.
The paper points out that over the past six months, asset managers have had to grapple with market volatility, extreme margin pressure, technology resiliency, cyber-risk and business continuity plans. However, many of these challenges were already bubbling under the surface and the pandemic is now forcing asset managers across the size and strategy spectrum to closely assess their operating models.
This is leading many to either embark or think about farming out functions to a third-party provider that were once considered core such as in-house dealing, foreign exchange and transition management.
“Big outsourcing waves have typically occurred at the end of bull markets as falling asset prices expose high fixed costs and margin pressure ensues. Last year however, many managers faced margin pressure despite markets going up” says Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets. “Covid has provided the opportunity for them to look at their operations and to make the necessary changes.”
While important cost is not the only driver though. As Paulin says, “The question fund managers are now asking is what functions do I have that add value to the investment decision making process. “For example, portfolio managers formulate strategy, while dealers implement that strategy. They are distinct roles and should therefore be resourced in distinct ways.”
He adds, “The aim of outsourcing should be to move asset managers to an optimal and future state which includes cost savings but also streamlined and greater efficiencies as well as an enhanced system of governance and control. This is particularly important in the light of the Senior Managers & Certification Regime (SMCR) “
The SCMR which came into force last year, holds individuals accountable for their conduct and business failures under their management.