Augustus Asset Managers
Digiterre Reduces Operational Risk in OTC Derivatives Processing for the Buy Side
Managing the operational side of trading in OTC derivative products is challenging enough for any buy-side firm. However, running five hedge funds, several long only funds and an absolute return fund with a combined total AUM in excess of US $8 billion presents Augustus Asset Managers Limited ("Augustus") with a challenge of unusual magnitude.
As with any well run operation, Augustus takes the operational aspects of trading OTC derivatives extremely seriously because like many firms it has witnessed explosive growth in the use of these instruments with total trade volumes increasing noticeably per month on a year-on-year comparison. Indeed, such dynamic growth across the market has led to serious concerns being voiced by Financial Markets regulators on both sides of the Atlantic, by both the FSA and SEC in recent years.
Not only do unconfirmed trades present a serious market and settlement risk but they can also hamper other operational aspects of managing a fund, for example, can unconfirmed trades be included in calculation of exposures in netting agreements? The FSA raised this exact question last year and said it was questionable. One of the key challenges for the industry as a whole (see Fig. 1 ISDA's 2007 Operational Survey) is to automate the workflow of processing OTC derivatives trades, especially the task of matching details on confirmations. Given the heavy use of paper documents and the fact that a firm is only as effective as its counterpart in this process, its not hard to see why its such a challenge.
Realized Business Benefit
- Automation of key processes.
- Middle Office specialists able to focus attention on value-add functions.
- Centralized place for all trade information.
- Better management of unconfirmed positions, resulting in better handle on operation risk.
Key Solution Requirements
When Augustus approached Digiterre it already had processes and tools in place to proactively monitor the confirmation cycle of its OTC derivatives business but it was keen to improve efficiencies as its AUM continues to grow.
The Augustus management team had a clear vision of what they wanted to achieve in terms of overall business benefits, but had yet to identify or specify in detail a suitable software application. The key requirements were as follows:
- Support existing workflow and automate where possible - Emails, faxes, Bloomberg screen grabs and paper based legal documents are not going to disappear overnight even with the introduction and growth of electronic confirmation and affirmation platforms.
- Full integration with their Portfolio Management system - Trades must STP into the system in real-time from the Front-Office.
- Product agnostic - Augustus is a Fixed Income and FX specialist but in the OTC world this still presents a significant number underlying instruments and the list of these is constantly growing.
- Complete customization of reports - Generating aging reports by counterparty for unconfirmed deals is a common middle office function and there is no margin for error in the accuracy of these reports.
- Pro-active alerting - Middle office specialists need to be alerted, for example, if a new deal is done with an unrecognized counterparty.
- Full document management capabilities - ability to store "golden-source" documents and audit any amendments that have been made.
- Key Performance Indicators (KPI's) - should be enforceable by management and monitored in real-time.
Michael Allen - Augustus's Chief Operating Officer:
"We wanted an application that replaced our existing database and could fit easily within our current infrastructure to perform a specific set of functions, at a cost-effective price."
Digiterre spent time with key Augustus personnel in the Middle Office and Technology functions to customize and deploy dConfirm in a matter of weeks.
The system is live and successfully being used by Augustus to manage approximately 1000 OTC derivative trades a month with headroom to handle many multiples of this volume.
In the words of Michael Allen, COO:
"The first implementation of dConfirm has given Augustus increased STP and improved reporting capabilities. It is hoped that future enhancements will continue this trend as we work together with Digiterre to increase connectivity to other post-trade platforms."
Carol Beaman, Augustus' Documentation Specialist, who is a day-to-day user of the system, has been impressed by the significant improvements dConfirm has made to her productivity:
"STP makes it easier to spend more time dealing with counterparties closing unconfirmed deals".
Sonal Amin, Augustus's CTO, who is ultimately responsible for the smooth running of the dConfirm and the underlying infrastructure commented on the technology:
"...since it's based on Microsoft Technologies, the underlying platform is a known and trusted quantity that doesn't require any hard to find specialist's skills to support - thereby keeping the overall operational costs down."
As a recent survey into the global hedge fund industry by Ernst and Young identified, robust operational risk management practices are coming under greater scrutiny by investors and regulators alike. Digiterre is already experiencing considerable demand for its dConfirm product from buy-side firms.
The use of STP platforms such as Swapswire, DTCC and TZero is also likely to grow although it is unclear who if anyone will actually dominate in this space just yet. For the foreseeable future it looks like any hedge fund operating with many counterparts in the OTC derivatives space will have to use more than one external platform. Thus it is unsurprising that Digiterre is looking at integrating these STP platforms into its dConfirm application to provide a centralized view for the buy-side for all its OTC derivatives activity.