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Bridgewater team that came up with this method for improving the way models work in our industry. There were a lot of long days of dealing with the two banks in getting this ready, but they are done and I believe our strategic partners will continue to see business grown in this arena.
GC: Can the dual outsourcing model be replicated for other business lines? EM: I can see this model being replicated in other segments of the business. For new areas of regulatory reporting, which requires interpretations and the filling out of new forms with tons of data that needs to be aggregated in a smart way, having this model where two banks help you go through this process is incredibly useful. Also, people may want to look at different types of risk models. What’ s important, however, is determining how important getting those processes right is and where that is in the priority stack because it takes time to get these things right, so we want to do this for the areas that make it better for our clients, firm and employees. For us, safety and independent verification of our clients’ assets is one of our top priorities.
If I were a regulator, I would love to see this model across the industry.
GC: What other operational challenges are you facing, and what solutions are you looking for? EM: We’ re going to see more opportunities around real-time data, and artificial intelligence will be applied to these processes, which could make them more efficient and drive costs down. However, there is a lot of work needed to achieve that as you need to make sure that these are very well tested before implementing them. Real-time data in the clearance and settlement space and custody space would be something great to move along. My view is that down the road this will continue to be a dual independent verification and it will continue to come down in price as technologies continue to enable greater efficiencies. When I look at the size of the markets, the amount of transactions that are done, the amount of data exchanged and the number of counterparties involved, having this double check is well worth it in terms of the high level of comfort you get from the increased level of security and resiliency.
In my opinion those are two big things that will continue to drive this model. In terms of clearing and settlement, custody and fund administration, I believe this model will continue to be adopted by others, because the total cost of ownership is actually cheaper when you consider regulatory filings and the like. As mentioned I would like to see more
“ Real-time data in the clearance and settlement space and custody space would be something great to move along.”
real-time data tools as well as the development of algorithms that pop not just data but information about counterparts or transactions that might be of interest. If you look at the lifecycle of a trade, it would be great if an algorithm could pick out and flag what to look at. I think you’ ll see more and more of that intelligence come into the industry and particularly this part of the industry.
The provider’ s perspective
Peter Sanchez, Northern Trust’ s head of North America Alternative Investment Services, gives his view on how the custodian has dealt with being the independent verifier for Bridgewater Associates.
Global Custodian: What has Northern Trust learnt from being involved in this model? Peter Sanchez: While the specific Bridgewater / BNY Mellon / Northern Trust model may not be replicated at many other firms, the foundation and trends it has triggered in terms of shadowing of IBOR / CBOR etc. has taken the reconciliation and shadow process to a new level. We have taken the principles of those controls for other shadowing projects with other clients. The main takeaway we have seen is that there is huge enhancement in client safety. Every day for the Bridgewater book, there is a daily independent verification of assets by both parties, with all positions and cash reconciled on a T + 0 basis, which is really unprecedented in terms of reconciliation. There is increased resiliency where all of their data is being reconciled by two independent technology operation platforms that are different from each other. For Northern Trust and BNY Mellon, they are both enhancing and broadening the control of the shadow on an ongoing basis, making sure they get best of breed.
GC: How will Northern Trust look to evolve this model? PS: The shadow offering has morphed as an IBOR or data reconciliation offering. Comparing it to the accounting or custody book of record – once we have the entire book of the fund, we are able to offer risk, performance, and treasury services because we have that data across all of the PMs and strategies. For a middle-office offering, it is expected to shadow the PM system to the P & L of the administrator, with an ability to do a custody check, as well as enhanced middle-office and data aggregation services. There is significant business opportunity for clients that have multiple managers and asset owners to use this model.
GC: How else can Northern Trust use the dual-outsourcing for clients? PS: We are using principles of the shadowing offering and offering a lighter version where we can shadow the reconciliation of our book of records and the PM systems of the client. We have taken the capabilities of the Bridgewater deal, and are building out a lighter version – where we then have a huge data aggregation and middle-office offering.
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