Global Custodian Hedge Fund Annual 2018 | Page 19

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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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