A Single Book Of Record

Jan 19, 2021
Chris Flynn
4
 min read

The Ridgeline team has spoken with hundreds of investment management firms over the past few years to discuss their business needs and challenges. While no two firms are the same, we heard a consistent theme: maintaining and integrating multiple systems is a costly endeavor and, worse, impacts a firm’s ability to serve its customers. Siloed applications are a historical artifact — a reflection of available technology at the time they were built. However, software and infrastructure have progressed significantly in the past decade, and now is the time to tackle the integration problem. Let’s get into the details.

Consider the industry concept of a “book of record.” Recently, fintech vendors have touted their ability to maintain an IBOR (investment book of record), which complements their ABOR (accounting book of record). PBORs (performance books of record) are also emerging from performance vendors. Typically ABORs, IBORs, and PBORs are maintained in separate systems, and each needs to be integrated to accurately calculate and maintain a book of record.

This raises a question: Can investment management firms afford to maintain separate books of record for each system? Frequently these systems are sourced from different vendors, but even when they’re from the same provider, they often operate on separate databases, architectures, and user interfaces. How does a firm know systems are properly in sync? Do integrations break whenever one system requires an upgrade? How is a firm expected to reconcile information between systems?

Consider an IBOR maintained within an order management system (OMS). Typically an OMS will refresh its positions in the morning using data from the accounting system. Is an IBOR a valid book of record if its positions are imported from another system? And yet, despite this complication, firms cannot reconcile positions with custodians without importing accounting data into their IBOR.

What’s more, throughout the day the OMS maintains an account of pending, executed, and allocated trades that have occurred on its platform. However, the OMS does not have knowledge of intraday transactions occurring in other systems. It may attempt to import these transactions (or the affected positions) during the day. Hopefully the separate systems process the transaction in the same manner and the import occurs without disruption. But how does your IBOR know for sure the intraday information processed correctly? By definition, a book of record must verify its information. Is the OMS doing this?

Investment managers are looking for a single source of data — a platform — that spans the front and back office. Many vendors tell a platform story. However, those platforms are built on various 90s-era technologies, loosely integrated behind the scenes.

The Ridgeline platform was built around the premise that a single, firmwide book of record is a fundamental requirement for any modern investment management platform. At the core of our platform is a double-entry journal accounting system. Positions, trades, and cash activity are reconciled daily with the custodian. Performance attribution is calculated using the same data journalized by the accounting system. Intraday, the impact of any transaction is broadcast to the rest of the platform. (We built an events-based microservices architecture to achieve this.) Each part of our system determines whether to process a change or ignore it. In addition, every module on the platform broadcasts internal updates. The key point is that every transaction is processed once, with the resulting change available to those functions that need it.

Again, let’s get specific. Consider a simple spin-off transaction: Company ABC spins off Company XYZ. The transactions show up in the start-of-day positions, but most order management systems receive the previous day’s close positions. The portfolio managers (PMs) decide they want to sell XYZ at market open. Early that day, the operations team processes the spin off in the accounting module. A firm using multiple legacy systems now needs to get those new positions from the accounting system into the OMS. Do they import the positions from accounting to the OMS again, further delaying the PMs? Or do they attempt to process the corporate action in the OMS, hoping the resulting positions match those in the portfolio accounting system?

In either case, the firm risks not entering correct trades in time for market open. With Ridgeline, once the corporate action is processed by the ops team, the resulting positions are available throughout the system. Individual modules will determine whether to process them. The trading module, for example, will want to reflect the positions immediately to prevent holding up the PM. The performance module will wait until the end of the day before incorporating these positions. The result? No duplicate transactions, and no need to move data from one system to another.

A corporate action is just one type of transaction that might affect an IBOR during the day. Consider cash contributions and withdrawals, previous-day trade cancel/corrects, or any number of custodian-reconciliation break resolutions as well. Each impacts the firmwide book of record and should be incorporated into an IBOR. But does a firm really want to integrate with the accounting system for every one of these transactions, every time they happen? Are you truly a book of record if you do not?

ABOR, IBOR, PBOR, and whatever other new books of record require maintaining and syncing systems across a firm. This is an expensive endeavor! An accurate, firm-wide book of record is a massive differentiator, but solving the integration problem once and for all requires starting from scratch. At Ridgeline, we’re doing just that — building a unified platform, using the latest technologies, on Amazon Web Services (AWS). Imagine what your team could accomplish if they weren’t fighting with integrations all day.

If moving to modern technology, streamlining workflows, and optimizing processes on a cloud-native platform energizes your firm, we have room for a few more design partners in 2021. If you’d like to see Ridgeline for yourself, please get in touch.

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