Technology in reserve management: Outlook for 2019

Reserve managers worldwide deal with a variety of different portfolios in terms of size, asset allocation and objectives. But all are looking for similar technology solutions to streamline their operations and better manage their increasingly complex portfolios.

More diverse portfolios require integrated platforms capable of providing efficient multi-asset management, and enhanced analytical capabilities to measure asset performance and risk exposure. Innovation is, therefore, paramount.

In Leaders in Reserve Management Services 2018, central banks identified the technological improvements, challenges and objectives that cut across their operations and their vendors. Cloud computing has emerged as one avenue that may provide a solution to reduce costs, while boosting data analysis. Security, however, is a concern and may limit its use among central banks.

As reserve managers attempt to strike the right balance between innovation and security to enhance their operations, training and knowledge transfer become essential.

Modernising infrastructure

In the near future, reserve managers will remain focused on “having a single system that can handle different asset classes well, both from breadth as well as depth coverage perspectives,” Raj Manghani, global head of product management at Calypso, which placed third for overall tech services, tells Central Banking. “That’s an area where we’ll see central banks going with vendors who have strong asset class coverage.”

The US-based software application provider offers a fully integrated solution for Treasury liquidity, counterparty credit risk, market risk, advanced fixed-income derivatives and overall reserve management.

“This is an area where central banks especially need more sophisticated tools to make a proper assessment of how much risk they’re being exposed to at any single point in time,” says Michael McDonough, chief economist and global business manager for central banks at Bloomberg, who came a close fourth behind Calypso.

“Most central banks require liquidity thresholds for foreign reserves investments. “You don’t want assets in your foreign reserves portfolio that you can’t later sell if your situation turns sour,” says McDonough.

Nonetheless, measuring the liquidity of specific instruments can prove challenging. Bloomberg has tried to address this problem with a new product capable of measuring liquidity. “It provides a score we can assign to those bonds to prove that you’re within the mandate,” says McDonough.

“Due to diversification, it is hard to find the information without one specific global platform,” Mario Esquivel, director of the reserves department at the Central Bank of Costa Rica, tells Central Banking. His department closely follows fixed income, money market, currencies, bonds, foreign exchange forwards and interest rates futures.

Multi-asset management also benefits from integrated platforms to speed up operations and enhance their analytical capabilities.

To measure the performance of individual trades daily, the Central American central bank initially used excel spreadsheets. But this proved inefficient to measure a full year. As more data accumulated over the months, it became time-consuming to reach the information needed. As a result, the central bank developed an in-house tool to improve trade analytics, and started using it in January 2019, Esquivel says.

“Very often in other platforms, after a trade is processed and validated, it is then sent to the accounting module or it may be passed by an end-of-day process to the collateral management system. In each case, they’re not sharing the same exact view of the trade," says Jerald Seti, VP product management at Openlink, an ION Treasury solution, which ranked first for customisation.

On Openlink’s platform, as soon as a trade enters the system, all users have immediate access to the same view of that trade for accounting, or collateral management or risk analysis. 

Diversification also drives demand for new measurement techniques of asset performance. This includes “more granular content and analytics to help central banks in reserve management”, says Calypso’s Manghani. “Things like fixed-income performance attribution – this means drilling down and understanding what the sources of performance were and comparing that to where the risks were taken.”

Head in the clouds

Cloud computing has emerged as one technology that has obvious benefits for reserve management given its potential to accelerate central banking operations while reducing costs. Through a hosted service, central banks would be able to optimise budgets outsourcing their IT management.

"For instance, a reserves department might have a huge need to run risk reporting at the end of the month.  On the cloud they can dynamically ramp up services as they’re needed,” says Seti from Openlink. 

Instead of investing in hardware on premises to respond to those peak periods, and leaving the equipment relatively idle the rest of the time, reserve managers can access these services in the cloud and just pay for the resources they are actually using.

Seti points out that over the last two to three years there has been a change in attitude in the financial services industry. “Because of the potential cost savings and the high standards regarding data security in the cloud, now they’re open to the idea and starting to take a closer look at it,” he says. “At the tail end of this cycle may be the central banks as they’re obviously much more conservative.”  

However, he thinks it’s just a matter of time before the cloud becomes generally accepted as the way most financial actors handle their computing needs.

“Cloud computing definitely offers a lot of potential,” Morten Kjærgaard, head of reserve management and collateral banking and markets at the National Bank of Denmark, tells Central Banking. “But like many other central banks, we’re focused on security. We need to carefully analyse the trade-offs involved in cloud computing. It could open the possibility of outsourcing IT management to the professionals because our system is very complex. But we’re not there yet.”

Establishing tight control over data access on the cloud is one of the main hurdles in the process to adopt cloud technology. “Demanding that central bank data remains within the national jurisdiction would probably be necessary,” says Kjærgaard. “We need to make sure our data is not accessed from beyond our borders.”

Tasja Botha, Openlink’s business development director for Europe, the Middle East and Africa, thinks that “due to portfolio diversification and more complex operations, central banks will actually be forced to consider cloud computing due to budget restrictions”.

She acknowledges data security is key, and data-holding within their own country will be necessary. But she insists “balance sheets are being squeezed so much that they will need to start thinking of different ways to make use of their existing budgets.”

If central banks become willing to adopt this technology, they are likely to do it through a hybrid model. “When it happens, it’s going to be some sort of country cloud, as well as them having tight control over what kind of cloud provider they’re going to go with,” Manghani says. “Obviously, having the data in the country is likely going to be a requirement.”

In terms of a cloud provider, whether central banks go with AWS (Amazon Web Services) or Azure (Microsoft), central banks will probably make the call based on their relationship with those cloud vendors, says Calypso’s product manager. 

“We will have to adapt to that and to fit into that ecosystem, which is exactly what we’re trying to do,” adds Manghani. “We’re building our cloud offering in a way that is highly flexible: it’s not tied to a single cloud provider, and is going to be adaptable to global hosting and regional, if not national, hosting down the road.”

Data: the new commodity

The sheer amount of data central banks gather through their reserve management operations also offers technology vendors another opportunity to grow. At the moment, challenges remain around how to collate and utilise the information in a way to streamline processes.

Clients using Calpyso accumulate huge amounts of data; finding ways to collate and utilise the information could result in further insight and increasingly streamlined processes.

Companies also find a data resource opportunity stemming from the numerous institutions using their systems across different markets. And they’re studying how to leverage that data to provide new services. However, as with cloud computing, data protection is an obstacle to commercialising modules harnessing clients’ data. Under the present legal frameworks that is not possible, and would entail a new framework regulating vendor-client relations.

Learning opportunity

The increasing complexity of the systems involved in reserve management, and the ever-growing opportunities new technologies may open for central banks, have also increased the demand for training and knowledge.

“There is a gap between financial knowledge and tech expertise,” says Esquivel from the Central Bank of Costa Rica. “We obviously have people with a solid background in finance, but not a sufficient understanding of IT, and vice versa.”

He thinks central bank staff need to get more involved in IT developments. “Now in portfolio management it is increasingly necessary to have a basic knowledge of programming,” says Esquivel. “If you want to solve any issue, you need to have people fluent both in finance and IT.”

Calypso has created a forum where all their central bank clients get to know what the company is developing, and what options may become available in the near future. “There’s a lot of hunger for trying to understand what are the opportunities in harnessing big data and related aspects,” Manghani adds.

Openlink has also enhanced its online training offering. It now provides customised videos ranging from simple explanations of three to five minutes to more complex presentations of 30 minutes, depending on how targeted the answer needs to be. Additionally, its users have access to a portal where they have materials divided by subject area.

“We’ve packaged our users' best practices so that we have standard implementations that can be implemented in shorter time frames,” says Seti. “We like to say here is the best practice, here is what other users are implementing. It gets them 80–90% of where they need to be as they can then introduce tweaks and changes to suit their particular needs.”  

Regardless of the future environment reserve managers will operate in, a more sophisticated understanding of both finance and technology will become a must in the sector.