The buy-side, globally and in Australia, has been afforded time and scope to adopt new solutions for how it sources trade ideas and liquidity for alpha generation.
Investment in technology has grown in line with funds under management, which on average has increased 7 per cent annually since 2011, 18 per cent between 2014 and 2015.
Fund managers today can pick and choose how brokers service them, with firms increasingly deciding to manage critical processes in-house.
There is, however, a growing focus on the ability of the buy-side to ‘future-proof’ its model in a digital economy filled with regulatory pressures, whilst avoiding the severity of change mandated for the sell-side which must now thrive in a market defined by illiquidity.
With greater capacity, scale and independence, the buy-side needs to anticipate greater interest from regulators who are keen to remind fund managers of their fiduciary duties to protect the interests of and achieve the best outcomes for investors.
Next generation thinking
Data governance is defined as the processes surrounding the monitoring and control of internal and external data usage.
The buy-side community has been examining that existing infrastructure firms currently have in place for investment purposes.
Of most interest are the steps companies undertake in order to ensure best-in-class data governance practices are adopted to help drive smarter investment decisions and meet regulatory requirements.
Inevitably, data associated with trade reporting, valuation reporting and collateral management are all likely to come under the spotlight as regulators look to gain deeper visibility and understanding of how information is applied and trade decisions are made within firms.
While the ecosystem continues to evolve, information from disparate sources is flowing through markets at an escalating rate.
Data is being collected by regulators, shared via an increasing number of news and research platforms, and being mined by proprietary systems.
To that end, the buy-side needs to be extremely forward-thinking by anticipating inquiries from regulators about their alpha strategy, potentially handling questions such as who did that trade, why, how was it funded, what collateral was put up, did your data memory provide a capital advantage?
The best way to approach this is to imagine if trades done today were queried in 2022.
Regulators, including ASIC, are already asserting their power to demand full taxonomy for specific trades.
As data grows in real time and historical value, demand for full disclosure of data provenance and use will increase. And so will data governance costs.
Coping with the costs
Managing data is one of the largest costs for any financial entity and will likely grow as more buy-side firms are mandated to collect, report, store, retrieve and process current and historical data.
Hence, how data is leveraged by toolkits and analytics will become extremely important.
Inexperience in implementing a holistic solution can cause problems in terms of data integrity, accessibility and timeliness, with undue time and effort spent on data validation and linkage. Any data governance solution should therefore aim to deliver the following fundamental benefits:
- Accurate, complete and reliable data that are proactively managed and delivered.
- Timeliness, accessibility and adaptability, along with the ability to on-board new internal and market feeds at speed with the application of business rules.
- Review and remedial action, through the use of dashboards and plans that visualise the predicted, actual and past states of processes and data content; and the ability to update data and processes should remedial action be required.
Many fund managers are hiring professionals from the sell-side to develop technology systems that enhance their in-house processing capabilities.
Managing data arguably becomes more complex for managers who are expanding investment mandates to manage multi-asset with international diversification, subject to global regulatory policies.
A data-respectful culture can be a differentiator
A ‘data-respectful culture’ starts with a mindset that consistently treats data as a strategic asset. Demonstration of this can be a key differentiator for Australian buy-side firms.
However, its adoption and evolution need to be just as fast and agile as the pace of regulators who are now armed with more resources, budget and power.
Taking a holistic approach to data governance will ensure the buy-side of regulatory-ready data, more efficient workflows and ultimately a lower total cost of ownership.
Emily Gordon is the head of Bloomberg Australia and New Zealand.
* Greyspark Partners report Digital Transformation of Investment Banking
