Guide to Middle Office Solutions for Investment Managers

Are you looking to streamline your operations and boost efficiency? By leveraging advanced middle office technology, you can automate processes and reduce errors.

In this comprehensive guide, we’ll explore the core functions of leading middle office software and systems. Additionally, we’ll cover approaches for enhancing operational efficiency and staying ahead of emerging trends in middle office automation.

Functions of Middle Office Software

Middle office solutions offer a range of critical functions to support investment managers.

1. Post-trade processing software assists in real-time trade matching, settlement, and reconciliation.
2. It enables consolidation of non-trading activities such as accruals, book payables/receivables and subscriptions/redemptions.
3. Reconciliation, primarily between Front Office Systems and custody, admin or other accounting systems.
4. Management of instrument lifecycle events such as corporate actions, expiries, coupon payments, etc.

Sometimes, middle office functionality can also include:

• Portfolio performance attribution software, such as calculations based on the Brinson-Fachler methodology.
• Portfolio Risk Management Software, which delivers features like risk reports (Value-at-Risk, sensitivities, etc) and scenario stress-testing.
• Investor reporting.

Three Approaches to Middle Office Solutions

Next, let’s look at the two most common approaches Middle Office Solutions are built on, plus a 3rd emerging approach.

1. One Holistic Middle Office Platform

In this model, one platform manages everything. It could be the entire middle office or even broader than that, such as with a front-to-mid/back office investment management system.

The benefits include eliminating integration headaches that often lead to manual processes. Workflows can be designed end-to-end to increase efficiency. In the end, you can reduce costs with fewer vendors.

2. Individual Middle Office Systems, Built One by One

The vendor builds one component at a time. For example, reconciliation software is separate from the confirmation and affirmation solution. This is a traditional approach in the industry, called “best-of-breed”. Middle office system providers specialise in one component of the investment workflow and build solutions for it.

3. One Holistic Platform – Based on a 3rd Generation IBOR

One challenge remains: Most middle office platforms are based on an Investment Book of Record (IBOR) model where only a limited set of position views are available. If the middle office software is to deliver position views to the front office, it must be able to show cash and holdings based on open orders. At the same time, reconciliation against accounting requires allocated trades only. These limitations are present in most front-to-back office platforms as well.

Best Practices for Middle Office Automation

Once you’ve chosen a model around the systems (or the system) to use, the next step is how to automate. An efficient operations setup enable asset managers to reduce costs and increase margins. Here are some aspects to consider when evaluating solutions:

Exception-based Workflows

Exception-based workflows are a form of automation.

• Software is responsible for performing tasks, typically anything currently on a calendar as a reminder or a task named “check that …”
• If all goes well, it’s a fully automated setup. If the software encounters an anomaly, an exception is flagged for a human to act upon.

User Experience

Modern investment management workflows are designed carefully. The vendor tests each step of a workflow with users. Continuous measurements are made on user journeys to improve existing workflows as well.

This workflow design approach starkly opposes how most systems in the investment management industry are designed. They’re created in silos to “perform one function”, and the result is fragmented experiences (and frustrated users).

Data Connectivity

Most investment managers spend significant resources managing data transmissions in and out of their systems. The three most common approaches are:

1. Manage data import-export manually
2. Build custom integrations
3. Rely on managed connectivity offered by vendors

These approaches are costly, especially the first two. The third, relying on vendors, leaves you in the hands of a vendor’s priorities and timelines.

A revolutionary new approach is an import-export application where non-technical users can build integrations quickly and with unrivalled stability. Learn more:

Emerging Trends in Middle Office Technology

As the investment management landscape evolves and new technologies emerge, middle office solutions adapt and improve alongside them. Here are some of the key trends shaping the future of middle office operations:

The Fast Rise of Artificial Intelligence (AI)

AI is a statistical model, which means it can never be entirely sure of an action. Therefore, it’s not suitable for exact workflows such as data transfer or reconciliation, where the tolerance for mistakes is zero. It is, however, exceptionally well suited for pattern recognition. We predict its main uses over the coming years is in analysing processes and assisting in identifying areas for improvement potential, rather than performing the actual tasks.

Digital Issuance

In the future, assets could (potentially) transition into being represented purely by tokens on a distributed ledger. A token represents anything of value, and a transfer is represented as a movement of a token. In such a world, many of the middle office processes currently performed will be unnecessary. No reconciliation would be needed, nor confirmations or matching. If you’re interested in learning more about this topic, make sure you watch our interview about digital issuance with thought leader Dr Ian Hunt.

Middle Office Outsourcing

While not a technology trend, it’s clear that more investment managers are considering outsourcing. Areas include trading and middle office services. The rationale is that managers are moving towards a state where they only do two things: make investment decisions and promote their products.