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Trusted Partners Take a Prominent Role in Managing Middle- and Back-Office Functions

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MUFG Investor Services recently met with Matt Rideout, Executive Director, Business Process Outsourcing (BPO), to discuss how clients are increasingly outsourcing back- and middle-office functions, as well as how the BPO team is helping clients adjust for market changes such as the move to T+1 settlement in the US.

Q: How are we helping hedge funds and funds of funds address challenges with their middle- and back-office operations?

In the hedge fund and direct trading space, we typically support middle office functions—trade processing, reconciliation and collateral—and we’ll help hedge funds and fund of funds with their back-office operations, including shadow accounting and other ancillary functions that help maintain a client’s books from an accounting perspective. In fact, we handle accounting across all different fund types for the wider official books and records business.

In addition, we can support asset owners with fund trading services across all fund types as well as dynamic reporting as needed to help them receive more up to date valuations of their portfolios.

Q: Why are we seeing more outsourcing in the financial services industry?

Clients benefit from outsourcing in many ways. For example, our Business Processing Outsourcing team helps clients reengineer systems and operations by leveraging technology, systems and processes we’ve already built. That’s the primary benefit for clients: We can service them in ways that it may be difficult or expensive for them to do themselves. Clients can outsource back- and middle-office functions, and be confident they are receiving superior service, without having to spend time and money building and maintaining their own technology. That’s not a small cost. In addition, by having MUFG Investor Services support their middle- and back-offices, clients avoid the ongoing human capital costs of those in-house functions.

Having confidence in outsourcing partners is especially important for clients that might have one physical location but conduct business that spans the globe. If a client is London-based and trading to the end of the day in North American markets, those clients need to effectively manage trades that happen near the end of day Eastern Time or work with a provider that can support them across global geography and in multiple time zones. That’s where our “follow the sun” model is very powerful. It allows us to be in similar time zones and be available essentially 24/7.

Q: So, does the benefit to clients mainly focus on location strategy?

No. It’s also about helping them manage costs. Clients realize that having offices in London, New York or Hong Kong that handle all trading and operations can be very expensive. By outsourcing to Investor Services, clients use our near-shore operations close to the main financial hubs—where we have excellent staffing and resources—and this gives clients the ability to manage costs more effectively. That’s a direct value for them.

By supporting their operations, essentially, we are saying to fund managers, “Focus on the things that you do best: Generating returns.” When they outsource processes and services to partners like us, they know we have the teams to meet their needs and we’re constantly updating technology to accommodate changes in the marketplace.

Q: What’s the process for evaluating client needs?

The process is unique for each client; there’s no “one size fits all” approach to what we do. Generally, we start with good working knowledge of what our clients are looking for. We have a basic framework and know how our technology can perform, so we work within that.

But that framework is flexible and we apply it to our clients’ unique needs. Sometimes clients might need three steps of a five-step process, while other times, they may need all or just one. We have the flexibility to tailor our services quickly based on the needs of their funds and managers, as well as how they act and react in the markets.
Depending on client needs, we’ll provide full middle- and back-office support through our technology and our teams. In other instances, we might offer human expertise alone. The third option sits in the middle, with a blend of our technology alongside client systems and processes, using our team members selectively.

Q: One of the biggest shifts facing the bond and equity markets is the move to T+1 settlement in the US, which will occur in May 2024. How is the firm working with clients to prepare for this change?

The move to T+1 is driving clients to outsourcing, and asset managers need to prepare now or risk having issues when the deadline arrives. We’ve had many conversations with prospective and current clients in a number of markets, in and outside the United States. One of the things we say most frequently is that firms need to ensure their infrastructure is equipped to move from T + 2 to T+1. While that may seem like a straightforward change—50% less time for clearing and settling—it’s actually less than that, and there are a range of issues that need to be addressed.

For example, there’s the requirement to support same-day affirmation for trades done on the actual trade date. This means that when a trade is made near the end of the trading day, firms need to have it affirmed immediately and released with proper instructions within a very short window. When T+1 takes effect, clients need to have high affirmation rates on trade date and be ready to settle with low failure rates. If they fail to settle on time, they may face penalties ranging from nominal to substantial, depending on the type of trade. Also, T+1 will be a challenge for asset managers’ infrastructures, which often incorporate end of day batch processes, because it limits the amount of time to correct issues that arise out of the data transmitted to the end of day.

The benefit of outsourcing those trades is that we receive them as they happen, post-execution, and then we use an automated process to affirm them as soon as possible to ensure clients are covered regardless of time zones. We have built the ability to handle real-time processing in our systems, and that’s another gain for clients.

Q: Are you finding that that T+1 discussions are focused solely on trade settlement?

Actually, the T+1 discussions are providing an opportunity for our BPO team to explore other ways of assisting clients. When we get into conversations with an asset manager, often we uncover other things we can help with, especially with firms that haven’t explored outsourcing in the past or have legacy systems or processes that haven’t been updated. We let them know that we can support them with trade flow, as well as robust reconciliation that connects to the trade operations, collateral management or a whole range of areas. We believe that clients receive the greatest value by using our full range of services, but we’ve also had great success with a phased approach, where we start with one area of work and then move to a second and third phases. We have a variety of ways to serve clients, whether it’s back office alone, middle office alone or a combination of the two. We can manage all their operations or help with specific areas.

Q: How are clients using Investor Services’ loan closing services?

Loan closing is a trade settlement service we offer to our clients. It is the post trade settlement processing for broadly syndicated bank loans. We offer assistance to take the trade from a committed to settled status through the trade confirm, transfer certificate and assignment agreement preparation, and settlement date process. We take on the task for clients using an application that enables us to handle these asset types from confirmation through to loan funding.

It’s a value-add to clients because this is something that historically can be difficult to manage, especially if firms have no history with outsourcing. Some asset managers have only one in-house loan closer and have been comfortable only using them. The downside is that those individual closers are tied to their offices depending on the loan closing schedule. Our service gives them greater flexibility—we have a deep bench providing coverage—at a compelling price point, especially if we are handling other asset types. Then we can seamlessly fold loan closing into our ecosystem.