To successfully address these complex challenges, investment firms are actively searching for trustworthy and reputable partners with in-depth expertise in post-trade execution. These partners have the ability to seamlessly navigate the intricate network of transactions and provide unwavering assurance to clients in their post-trade activities. 

This blog explores the intricate landscape of trade confirmation and settlement, unravelling the six pivotal steps underpinning these essential processes. Our aim is to demystify the intricacies and shed light on the crucial stages that culminate in the seamless execution of trades within the financial realm. 

Key Stakeholders in the Trade Settlement Lifecycle 

Navigating Trade Settlement Complexities 

Although the trade settlement process aims for efficiency, its complexity arises from various factors. Let’s delve into some of these intricacies and examine why clients frequently rely on external institutions (such as custodian banks and clearinghouses) for assistance in trade settlement: 

• Regulatory requirements: Different geographical regions and financial markets adhere to distinct regulatory frameworks for trade settlement. Complying with these regulations adds intricacies that require specialized expertise to navigate effectively.  
• International transactions: Cross-border deals introduce additional complexities related to foreign exchange dynamics, tax implications, and adherence to global legal regulations. 
• Trade volume and frequency: Institutional investors and traders often handle a high volume of trades. Managing settlement for such a large volume of transactions can be time-consuming and prone to errors. 
• Trade types and instruments: Financial markets host a variety of trade types and instruments, including equities, bonds, derivatives, and more. Each instrument’s settlement process possesses unique characteristics, contributing to overall complexities.
• Time sensitivity: Timely settlements are crucial to prevent trade failures or penalties. Ensuring all parties meet deadlines requires efficient communication and execution. 
• Risk management: Trade settlement involves counterparty, operational, and market risks. Inadequate risk management could lead to financial losses. 

In response to these challenges, investment firms are actively seeking reliable and proficient partners who can confidently manage post-trade execution activities. This is where expert consulting firms come to the forefront, offering comprehensive trade settlement services tailored to the unique requirements of investment firms. 

These firms understand the pivotal nature of the settlement process and the financial and reputational consequences of errors. With a team of experienced professionals, cutting-edge technology, and a profound grasp of the financial sector, these firms are well-prepared to handle the complexities and intricacies of trade settlement. Through meticulous attention to detail and stringent quality control, they ensure accurate and efficient processing of each trade, mitigating the risk of errors and reducing potential losses for clients. 

Conclusion: 

Trade settlement facilitators play a pivotal role in aiding clients with their trade settlement needs. These facilitators offer an array of services aimed at streamlining and speeding up executing and finalizing trade transactions. Their services typically encompass trade matching, clearance, and settlement. Harnessing cutting-edge technologies and established networks guarantees accuracy, transparency, and security in trade settlements. Clients reap the benefits of minimized operational risks and expedited error-free settlement cycles. Moreover, these facilitators provide valuable insights and reporting, empowering clients to make informed decisions and optimize their trade activities. 

Hedge funds strive to attain strong investor returns through varied investment approaches. They must establish structured fund management, compliance, and reporting systems to accomplish this goal. This is crucial to satisfy investor demands, maintain competitiveness, mitigate risks, adhere to regulations, uphold transparency, improve efficiency, and prevent regulatory issues.  

Efficient middle and back-office operations play a critical role in ensuring seamless operations of the fund, and adherence to regulations, resulting in the generation of accurate and reliable reporting. Systematic middle and back-office operations form the backbone of a well-structured and successful hedge fund by managing the operational aspects that underpin the fund’s activities. 

Fund managers understand that it can be difficult to support and scale their operations team; instead, they are moving to outsourced providers to satisfy critical requirements.  The right Managed Services Partner will streamline their middle and back-office operations, allowing them to focus on core business activities and capitalize on service level agreements, which include expanded coverage across multiple time zones.   

This article explains the advantages of outsourcing middle and back-office functions and how it enables fund managers to enhance their operational efficiency and competitiveness in the market. 

Expert Middle & Back Office Support 

Outsourcing middle and back-office operations provides hedge funds with the benefit of utilizing a team of skilled professionals equipped with specialized knowledge. By harnessing this expertise, fund managers streamline their processes, improve productivity, and enhance risk management practices. 

• Optimizing Hedge Fund Efficiency – Hedge funds employ diverse investment strategies to achieve returns surpassing traditional market benchmarks and align with investor expectations. However, the intricate nature of middle and back-office operations can strain a fund’s resources and time, because it requires meticulous attention to tasks such as trade execution, risk assessment, and regulatory compliance. The shift in focus from operational tasks to more investment-focused tasks allows fund managers to make more informed decisions, adapt quickly to market changes, and seize lucrative opportunities.
• Adaptability – Partnering with a service provider with diverse asset class and accounting expertise equips hedge funds for swift adaptation to market shifts and strategies. This seamless flexibility facilitates scaling in trading new asset classes, bolstering the fund’s ability to navigate market fluctuations and make informed decision-making confidently. Fund managers gain reassurance that their daily middle and back-office operations remain unaffected by altering strategies and trade volumes. Expert service providers adeptly accommodate changes, minimizing implementation time and managing the learning curve effectively.
• Advisory – Choosing the right managed service provider is of utmost importance. A reliable service provider surpasses the responsibility of guaranteeing precise daily middle-office and back-office activities. They proactively collaborate with fund managers to enhance workflows and provide advisory support. This approach involves identifying challenges and offering tailored solutions, like incorporating automated swap settlement and reconciliation processes. This is supported by implementing complex tasks like reconciling performance and financing interest against broker files; and adapting tax lot reconciliations to align with specific client preferences, ensuring accurate Profit and Loss (P&L) and General Ledger Providers play a crucial role in delivering valuable expertise and encouraging the adoption of best practices among their clients. This is achieved through a structured series of workflow assessments that are designed to enhance the efficiency and effectiveness of their client’s operations. The provider’s commitment transcends contractual obligations, validating the decision to outsource by delivering extra value. Such dedication reinforces the partnership and cultivates a successful, efficient, and productive relationship with the hedge fund.
• Utilizing Time-Zone Difference – Asset managers collaborating with overseas outsourcing partners gain access to a dedicated and efficient support team available around the clock, spanning pre-market and early trading hours. The time zone disparity enables hedge funds to receive continuous support and real-time aid, even during their non-working hours. With a local presence in the US office, clients enjoy 24/5 coverage. Moreover, the US-based team collaborates closely with fund managers and operations heads, directly streamlining workflows and executing new strategies. This setup ensures rapid issue resolution and seamless operations, minimizing downtime and maximizing productivity. The presence of a dedicated support team empowers hedge funds to tackle operational challenges and sustain uninterrupted functionality. This dynamic contributes to their overall success and competitiveness within the market. 
• Customization and Scalability – It is imperative that outsourcing partners recognize the distinctiveness of each hedge fund and understand the importance of catering to their unique requirements. Consequently, the right partner will offer tailored solutions to accommodate individual needs. This necessitates that the outsourced partners possess functional expertise and a technical understanding of the client’s preferred systems and technology. Customization may include curated portfolio reporting, specialized tax lot services, portfolio re-balancing, manual journal entry setups, handling swap and borrow financing adjustments, and other ad-hoc requirements unique to the fund’s operations. This level of personalized service ensures that the outsourcing partner can efficiently address the fund’s individual demands, providing comprehensive and bespoke support that enhances operational efficiency and accuracy. The ability to cater to such diverse and specific requirements further validates the value of outsourcing for hedge funds seeking a highly adaptable and dedicated partner. 
• Risk Mitigation & Better Governance – Efficient outsourcing partners play a pivotal role in assisting hedge funds to navigate risks and enhance governance practices expertly. Their valuable service involves adeptly managing and mitigating operational risks while meticulously monitoring Net Asset Value (NAV) and discrepancies stemming from Fund Administrators’ inputs. This comprehensive process encompasses tasks like calculating dividends, swap accruals, and other non-trading calculations, alongside routine daily and month-end checks. The primary goal is to swiftly identify and rectify potential errors, thus minimizing the chances of financial complexities or regulatory issues emerging during audits. This consistent dedication to compliance and regulatory standards nurtures a deep sense of confidence within hedge funds, highlighting the integrity and professionalism that characterize their partners’ operational approaches. 

FinServ Consulting’s Role in the Middle and Back Office Industry 

FinServ Consulting’s managed services team provides efficient trade, cash, and position reconciliations, allowing front office and operations teams access to reliable, updated, and error-free information.  Accurate positions and NAV data allow portfolio managers and traders to confidently focus on order generation, including sizing and position allocations. 

In addition, our service offering includes daily P&L checks, tax lot reporting, swap financing and dividend accrual assistance, hands-on systems entries, and overall guidance with the goal of ensuring efficient month and quarter-end accounting closes.   Any discrepancies or differences with fund administrators, prime brokers, and other counterparties are resolved quickly and remediated in real-time.   

FinServ Consulting places significant emphasis on five critical service areas, enabling the delivery of quality reconciliations and back-office reporting. This is achievable due to FinServ’s extensive expertise in various aspects of hedge fund operations and a deep understanding of systems and technology. 

Conclusion

Outsourcing middle and back-office operations offers hedge funds a strategic advantage by allowing them to focus on their core business, access to specialized expertise, utilize time zone differences for non-working hours support, receive prompt responses, and benefit from tailored solutions. It enhances risk management practices, improves operational efficiency, and ensures better governance, ultimately supporting hedge funds in their pursuit of excellence in the highly competitive financial landscape. 

An HCM solution is an integrated system that automates HR functions combined with finance, planning, and analytics and allows for employee self-service capabilities, thereby reducing labor costs, optimizing business processes, and increasing efficiency. Companies that transition from manual processes and disparate legacy systems to modern, cohesive digital workforce management technologies can realize up to 15-25% cost savings related to HR and IT spend.

Most current HCM solutions are offered as a cloud-based, SaaS delivery model and include modules for payroll, HR, time and labor management, and recruitment. This type of solution does not require an expensive hardware investment and constantly updates software to the latest version while maintaining secure backups. These systems are monitored at all times and provide the utmost reliability. An added plus for asset managers is that the solutions can be customized to suit the size of any company and grow as the organization grows.

At FinServ Consulting, we have experience working with firms of various sizes in the alternative asset management industry to select, implement, and/or upgrade their HCM systems. While there are numerous benefits of having one comprehensive, integrated HCM, there are other options available on the market such as lite solutions that meet basic needs without all the added features that may not be necessary for some firms, as well as point solutions that cater to the industry’s unique needs, like complicated compensation structures. FinServ can help assess your company’s specific requirements to identify what to be aware of in terms of missing features, implementation issues, and cost-benefit analysis of different HCM options.

Benefits of a Consolidated HCM

Attract and Grow Talent

Recruiting top talent and keeping them engaged is no longer just HR’s responsibility—talent objectives can have a significant financial impact on growing a financial services business. Implementing a new HCM system can help enhance performance management processes to eliminate bureaucracy and encourage meaningful conversations between managers and employees focused on performance improvement. In addition, better compensation data and visibility of top talent allow managers to make more well-informed decisions regarding performance and rewards.

Some clients in the alternative asset management space that FinServ has previously worked with used manual spreadsheets to manage staff performance, as well as recruiting and other functions in some cases. However, by opting for a consolidated HCM system, these organizations were able to use more sophisticated workflows to provide employees with more meaningful feedback. Also, they could track and monitor operational outcomes and staff development across the company to ensure a payback from their HCM investment.

Make Better Informed Decisions

Asset management firms in the current environment face increasing regulatory scrutiny, such as GDPR, AIFMD, and Form PF, and constantly evolving standards. In order to meet the new generation of demands, these companies need to make well-informed investment decisions with visibility into all business lines. However, this is a difficult task when the data required to deliver these insights is housed in disparate legacy systems with varying formats and level of detail. This is where having consolidated HCM comes in—a single system for finance, HR, planning, and analytics can offer the necessary foundation to gain better insights, save time on data aggregation, and proactively solve business problems. A digital solution of this type can help improve business margins, provide competitive differentiation, attract and retain customers, and identify lucrative areas for growth.

Harness the Power of Modern Data

Today’s financial companies have an unprecedented amount of valuable data across their organization. However, many are still not able to access this data due to isolated, unorganized, and inaccurate legacy systems. The data warehouses that are typically accessed by business intelligence tools to create reports or perform financial analyses hold data that was accurate at the time it was loaded and refreshed from legacy systems, resulting in a high likelihood that it is out-of-date and unreliable. As a result, financial services firms often turn to add-on custom software solutions to try and achieve real-time data extraction, but these products often produce further challenges because they require continuous maintenance to keep up with the changing needs of the business.

Implementing a contemporary, consolidated HCM system allows firms nimble access to the real-time data that is necessary for constantly changing business needs. These solutions include technologies, such as cloud computing, open APIs, artificial intelligence, and machine learning, that make insights transparent and accessible across lines of business.

Build Organizational Agility

Being agile is key to an asset manager’s long-term success and there are several factors at play in building organizational agility:

• Adaptable: A flexible technology foundation is essential to be able to change organizational structures and processes in response to regularly shifting business needs.
• Skilled: Financial services firms, among others, face a widening skill gap and must find ways to upskill their workforce.
• Empowered: In order to perform at the highest potential to meet evolving consumer expectations and drive success, employees need full access to data to make business decisions.
• In Control: The need for measurement and control goes hand in hand with agility and speed. Asset managers must measure more relevant KPIs to learn from what works and what doesn’t when it comes to new digital revenue streams.

There are common obstacles that firms must overcome to meet the guidelines above, including inflexible legacy technologies, bureaucratic organizational culture, and a lack of relevant employee skills. By using a comprehensive HCM solution to add intelligence to business tasks, financial firms can move past these challenges and employ integrated, real-time planning in order to build organizational agility and realize their digital growth aspirations.

Choose the Right Solution

As mentioned previously, there are many HCM offerings available on the market and it is important to select the right one to meet your firm’s unique needs. There are several factors to consider, such as the needs and priorities of the business, size of the firm, and desired metrics and reporting abilities. FinServ Consulting has experience working with asset management firms to identify and implement a suitable HCM solution. We can help you make the right decision and take full advantage of the capabilities and rewards that the new solution will provide.

Summary

If you are interested in establishing or improving your firm’s HCM platform, FinServ Consulting is the right partner to help you reach your firm’s strategic objectives.  Throughout our 15 years of existence, we have proven that our deep industry knowledge combined with our project management and overall best practice methodologies can be an asset to your organization. To further continue the conversation or to discuss more of FinServ’s capabilities, please contact us at info@finservconsulting.com or give us a call at (646) 603-3799.