Solutions hit the mark. Photo: Khongtham Source: shutterstock

Surge of growth in trades: solutions hit the mark

Author: Mathias Wilhelm and Jürgen Lemmen

The increasingly complex regulation of securities trading and the growing volume of trades are presenting a challenge to many fund initiators. Four years ago, in response to statutory requirements and with a good sense for new solutions, Universal-Investment established the Middle Office as a separate department, and carved out its tasks from fund accounting. Looking at the Middle Office and the reaction from clients, it is clear that the decision to offer the processing of securities orders and increasingly also collateral management has been a success.

Jürgen Lemmen, Head of Middle Office, Universal-Investment Photo: Manjit Jari Source: Universal-Investment

Ten years ago, stocks with a total value of around 66.6 trillion US dollars were traded, and by 2017 this figure had risen to just under 77.6 trillion US dollars*. It should be mentioned, however, that these figures relate only to stocks and not bonds, currency instruments or derivatives. Fund initiators are also experiencing this increasing complexity in daily securities trading and the growing volume of trades. Four years ago, this situation was reason enough for the Munich-based fund initiator Vescore to contact the relatively newly founded Middle Office department of Universal-Investment and avail itself of its services. “The Middle Office handles all processing for us. This saves us time and money, which allows us to concentrate on our core specialisms,” explained Stephan Schneider, Executive Director and Head of Portfolio Management at Vescore.

*Source: World Bank statistics "Stocks traded, total value (current US$)" 

Jürgen Lemmen, Head of Universal-Investment’s Middle Office, does not see the processing of securities orders as a USP for asset managers or fund initiators. This means that they can quickly and simply hand such tasks over to the Middle Office. This allows clients to do without complex IT systems, frees up personnel capacities for other matters, and removes the need for them to deal with regulatory changes or their implementation. The service is particularly beneficial too for entities with low trading volumes. “We can even provide services to asset managers for whom we are not their investment company,” according to Lemmen.

Mathias Wilhelm, Head of Securities, Universal-Investment Photo: Manjit Jari Source: Universal-Investment

The Middle Office handles the matching for all securities, including derivatives, on a standardised basis.

Mathias Wilhelm

But processing securities orders is only one of the tasks carried out by the Middle Office, which was founded in 2015 and now has 21 employees. Their field of work now spans the entire processing business for the funds they serve – from instruction through to final settlement. “The Middle Office handles the matching for all securities, including derivatives, on a standardised basis. Non-liquid assets such as real assets and real estate, on the other hand, are processed by us using dedicated processes,” explained Mathias Wilhelm, Executive Director and Universal-Investment’s Head of Securities. Wilhelm and his team help the Middle Office team tailor their services to the market, and integrate them into the overall range of securities-related products.

Clients make fixed costs variable

In 2015, Universal-Investment decided to carve out the Middle Office in response to the increasing complexity of fund accounting, and to offer it as a discrete service for asset managers and fund initiators.

Universal-Investment’s decision was backed up by regulatory requirements that securities trading be separated from processing. “These days we take it for granted that the front, middle and back offices are separate – but that was far from the case back then,” Lemmen recalls. The administration specialists also wanted to offer added value for clients with the outsourcing of processing. A fast connection that does not require significant effort allows clients to reduce their fixed costs and make them variable. They only pay for trades that are processed by Universal-Investment.

The Middle Office handles the processing of more than 260,000 transactions every year in every asset class, including securities, exchange-traded derivatives and over-the-counter derivatives (OTCs) for the 1,214 funds that Universal-Investment serves in Germany and Luxembourg.

To this end, Universal-Investment maintains partnerships with connected 32 custodians. “We work with all renowned custodians in Germany and Luxembourg, which gives us access to all globally relevant local markets,” Lemmen explains.

We process securities orders with a high degree of automation.

Jürgen Lemmen

Highly automated transaction and matching system

In a securities sector that is getting faster and faster, a high degree of automation in the processing of securities orders (straight-through processing or STP) is particularly important. The Middle Office uses the program DTCC Omgeo, a leading transaction and matching system, for its securities business. “We process securities orders with a high degree of automation. Most asset managers do not have such a high level of automation in their own middle office because they do not use these kinds of matching systems on account of the costs. The volume of their trades does not make it worthwhile,” the department manager said.

According to Lemmen, asset managers still occasionally encounter fax instructions when processing transactions. Some highly regulated partners such as banks still send faxes in order to ensure legal certainty with signatures on paper. Universal-Investment has made great progress on automation, robotisation and the optimisation of interfaces in order to make this handling more effective in the future and offer clients a competitive service.

Experiences with the Middle Office

“We were able to sell the Middle Office’s services to a large number of fund initiators,” Wilhelm said. The department’s potential clients include fund initiators, other investment companies and institutional investors. It turned out that interest in the processing of securities orders by Universal-Investment was greatest among smaller firms in particular.

Marian Klemm, for example, a portfolio manager at the Hamburg-based fund boutique nordIX, has been working with the Middle Office for two years. “In am particularly happy with the support, response and know-how offered by the specialists of the Middle Office. I feel very well taken care of with my challenging, derivative-heavy mandates,” the portfolio manager said. This is why Universal-Investment was the first choice when it came to transferring a nordIX fund to another investment company. Klemm now no longer sees Universal-Investment’s Middle Office as a mere outsourcing partner. “I actually consider the team to be my colleagues, who I also value highly on a personal level,” Klemm added.

Dedicated collateral management platform

Collateral management, which Universal-Investment has offered as a dedicated module in its Middle Office since the end of 2018, is attracting growing interest from institutional investors. Funds trading OTC derivatives require collateral management. This has been mandatory since the regulation of over-the-counter trading by the European Market Infrastructure Regulation (EMIR) in 2012. The parties to a trade (funds and counterparties) exchange collateral. The Middle Office regulates this exchange of cash or securities, and takes care of any disputes.

Universal-Investment now has its own Collateral Management System, which around 100 funds are linked to and which all new mandates are added to. “Due to our one-stop shop approach, it makes sense both for us and for our clients for Universal-Investment to offer collateral management,” according to Lemmen. Institutional clients take a similar view, as confirmed by a Volkswagen spokesperson: "The transition was smooth, both for us as an institutional investor and for our asset manager partners. We were above all persuaded to entrust our collateral management to Universal-Investment by the high quality of the process, and of course the cost-related arguments.”

For Lemmen, successively transitioning to in-house collateral management is the right decision, because in addition to improved quality thanks to its in-house system and lower costs, Universal-Investment also offers clients faster onboarding and offboarding.

October 2019 

Author: Mathias Wilhelm and Jürgen Lemmen
Date of issue: 1/21/2020