Fixed Income Revenues are Hamstrung by Fragmented Operations

SimCorp has  released the findings of a newly commissioned WBR market survey, ’Fixed Income 2018: Goals and Challenges for the Front Office’. The report reveals 66% of Fixed Income professionals are seeking to reduce high operating costs, which impact profitability of the Fixed Income desk, as their number one priority for 2018. The report comes at a pivotal time in the global market, marked by the return of inflation and volatility, and unveils the impact of costly and ineffective fragmented operations, critically affecting the success of Fixed Income desks.

Ahead of the upcoming TradeTech US Fixed Income Leaders’ Summit, WBR Insights, the research division of Worldwide Business Research, surveyed 100 North American Fixed Income professionals, from traders and portfolio managers to CIOs. Among the priorities listed, was the need for new Fixed Income technology, cited by 63% of participants. These technological enhancements, coupled with the constant pressure to reduce costs, indicate that the current operational environment of legacy and best of breed systems cannot support the long term strategy of Fixed Income desks, and are also an expensive burden on day to day front office activities and P&L.

According to the report, Fixed Income desks face a number of critical challenges:

  • 81% are hampered in understanding firm wide limits, counterparty exposure and other important risk indicators

 

  • 70% find securing timely and accurate start of day/intraday positions and cash projections challenging

 

  • 59% struggle to measure investment performance relative to blended benchmarks/indices

 

  • 56% spend up to an hour reconciling positions and cash at the start of their day, just to reach a ‘satisfactory confidence level’

Many Fixed Income desks are impeded by a history of adding additional systems and interfaces whenever a new challenge has arisen. As a result, they are now not only faced with increasing maintenance costs, but also heightened investment and operational risk, caused by data gaps between the multiple systems put in place, to support the investment lifecycle. To date, many firms have attempted to overcome this obstacle by deploying more resources to fill in these critical gaps. With tighter margins leading to leaner teams, this status quo has now become unsustainable and more importantly, is eating into time spent on vital alpha generation.

Terry Flynn, Front Office Specialist, SimCorp said: “The report’s findings make it clear that Fixed Income operations is in need of significant change. For years now, investors have ploughed their assets into cheap multi-asset ETFs. Fixed Income professionals have a real opportunity to fight off this passive trend, but they must first confront the fragmented operations that burden their daily lives. Delayed and incomplete data, limited firmwide exposure views, restrictive asset class coverage and Excel-driven manual reconciliation, have tied the hands of many Fixed Income desks. To free themselves of this burden, firms need to eliminate the bottlenecks by consolidating their investment operations. This will create the operational efficiency required to deliver competitive returns and attract and retain investors.”

Oliver Kirkbright, Content Director, Fixed Income Leader’s Summit, WBR: “With the return of VIX volatility and increasing inflation driven by the recent Federal Reserve interest rate rise, the fight for fund flows, between active management and passive management has taken a new turn. Fixed Income professionals have a clear opportunity to gain back market share. But to do this successfully, they need to address the operational hurdles that are currently thwarting their profitability, and seek a consolidated operational strategy that will deliver immediate results, as well as  long term profitability.”

Click here to access the full report Fixed Income 2018: Goals and Challenges for the Front Office