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The Future of Operations: Simplify, Innovate and Transform

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This article is sponsored by Broadridge.

Now that the pain of the global financial crisis and subsequent regulations are starting to fade from view, the asset management industry is facing new challenges that will transform the business. Firms must be nimble enough to support this evolution. That means not only redesigning operations, but also adopting new technologies that can be used for innovation in-house and with the help of partners.

In active management, the industry has created more complex products to generate alpha, while the growth of passive management, spurred by fintech competition, is compressing fees. At the same time, expansion into new markets has added costs. Facing these challenges will require serious improvements to back- and middle-office operations — an overhaul of everything from data validation to trade reconciliation.

For this type of transformation, experts say, it’s not enough to improve the steps in a process. Financial institutions need to eliminate steps. Specifically, executive members of the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) say that leading firms should:

Work collaboratively. Firms should collaborate to solve common problems; use associations to identify and promote best practices; and partner with service providers, utilities and regulators to tap their specialized skills and mutualize non-differentiating functions.

Tackle common pain points. Many of the industry’s biggest challenges come from a lack of standardized processes: Standardizing data is the top challenge and sets a foundation to accelerate change.

Leverage transformational technology. Cloud computing, artificial intelligence, and distributed ledger technology can be transformational over the coming three, five or 10 years — but investing now is vital.

Assess, accept and mitigate risks. During times of large transformational change, it should be understood that risks are higher. This traditionally risk-adverse industry must balance the need for bold change against the fear of producing subpar outcomes.

This paper asks how asset managers can move beyond incremental improvements, like shaving costs from processes like post-trade settlement, regulatory compliance and reconciliation, to reimagining how operations are handled. Based on discussions with executives from leading asset management, buy-side, and sell-side firms, as well as service providers, it assesses the drivers for change and the challenges and opportunities ahead, and discusses what actions the industry must take to reach its desired future state.

The long-term vision of how asset management operations should change is best summed up by one word: Simplify.

To learn more about “The Future of Operations” for the asset management industry, download the white paper from Broadridge and the SIFMA Asset Management Group.

To learn more about Broadridge’s solutions for the asset management industry, please visit www.broadridge.com/financial-services/asset-management/

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Novel liquidity instruments need of the hour for Islamic financial institutions

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This content is by Marmore Mena Intelligence.

Islamic finance is still a relatively small part of the broader financial services industry. Compared to the conventional industry, Islamic finance lacks adequate liquidity instruments as Shariah restrictions limit the number of instruments that could be used for liquidity management. Islamic interbank and money markets also lack the volume and diversification of conventional markets leading to a sectoral disadvantage from the outset.

Review of 2018
Since 2015, there has been a reduction of liquidity in the banking systems in the Middle Eastern region, mainly due to reduced deposit inflows because of low oil prices and a high dependence on deposits from governments and their related entities. This situation has improved in 2018 after oil prices stabilized and governments issued large bonds and injected liquidity locally. However, the dearth of Islamic liquidity management instruments has been a challenge in Islamic banking ever since its inception. The instruments that meet both the industry’s needs and the stakeholders’ expectations are relatively few. The excess liquidity of Islamic banks limit their profitability potential and therefore their long-term viability, it also dampens the effect of monetary policy interventions in the financial markets by central banks.

The onset of Basel III liquidity coverage requirements is likely to exacerbate the problem as Islamic banks will need to maintain high quality short-term liquid assets. As a result, Islamic banks, which are concentrated in the Middle East, hold 8.8% of their assets in cash and equivalents and 9.8% of their assets in placements at other financial institutions. Currently, Islamic banks place liquid funds through short-term instruments such as commodity Murabahah that are non-tradable on secondary markets — Shariah rules prohibit trading on receivables. Moreover, stakeholders typically view these inflexible instruments as artificial replications of interest based transactions. Alternative instruments are gauged against three criteria: whether they are as cost-effective as commodity Murabahah, whether they offer the same or enhanced flexibility and liquidity, and whether they offer sufficient scale to meet the current and anticipated future needs.

Preview of 2019
New strategies to meet the liquidity management needs of Islamic banks and Islamic windows at conventional banks are being developed. These products — including National Bonds’ Sukuk Trading Platform addresses both the operational needs of Islamic banks and preferences of their customers and external stakeholders. In liquidity management, it has the potential to be both flexible and authentic, offering an investment destination for surplus funds or a tool with which financial institutions and central banks can look to as a model for providing liquidity to banks when needed. Islamic banks will shift toward Islamic liquidity management instruments that increase their ability to place more of their surplus liquidity with other banks or with the central bank.
Closer integration may also lead to increasing Sukuk issuance, which could reduce Takaful operators’ exposure to riskier real estate and equities investments or help banks manage their liquidity. Sukuk could also provide investment funds with additional fixed-income revenue, and encourage a shift toward more profit-and-loss sharing instruments. In addition, Islamic banks could start offering Takaful products more systematically if the relevant regulation is in place.

Standalone Islamic banks will have to look to government Islamic T-bills, or other instruments to place most of their surplus liquidity. Some of the remainder will be held on balance sheets as cash in order to manage unexpected shocks because of a smaller set of central bank instruments. A portion of the assets they hold today as cash will be shifted to interbank placements in order to generate yields. However, given the cyclicality of excess liquidity in GCC banks, there will probably be a continued reliance on commodity Murabahah, which amounts to an effective outsourcing of some of the cash management responsibilities at Islamic banks to Islamic windows, which have a deeper set of options and more access to international liquidity management instruments.

Conclusion
Islamic liquidity management instruments are still at their infancy, and the main challenge is in providing liquidity management tools that can compete with conventional ones. Therefore, Islamic financial institutions should invest more in product development. In particular, as Islamic finance grows, the problem of liquidity will grow bigger, as central bank support would become expensive particularly for larger institutions.

Although a variety of approaches have been adopted in different jurisdictions, much work remains to be done to diversify the mix of available options for Islamic banks to manage their short to medium-term liquidity. Further, the divergence in Shariah interpretations across different jurisdictions has so far stifled a truly global approach toward tackling this issue. In this regard, the setting up of organizations providing Shariah standards such as AAOIFI and the IFSB are playing an important role in bridging this gap. Liquidity management continues to remain at the core of the issue that regulators need to address to ensure the healthy growth and development of the Islamic banking sector.

View the full briefing at Marmore Mena Intelligence.

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The Month That Was – Equities off to a flying start in 2019

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GCC equity markets greeted its investors in celebratory fashion, recording its highest monthly gains in over two years. Investor sentiment was bullish, as the influx of foreign funds, uptick in oil prices and expansionary budget policies are all expected to support corporate earnings growth in 2019. The story was no different in the global markets, as equities continued to be the flavour of the month among investors. The U.S. and Emerging Markets witnessed a reversal in fortunes, putting the misery of 2018 behind them. A recovery in oil prices was also underway, as U.S and China take steps to resolve the trade dispute while Saudi Arabia affirms its commitment to avoid a supply glut.

We see the following three issues as key developments during the month of January:

GCC State Budgets 2019 – Still in expansionary mode: Indications from GCC countries largely seem to suggest that they are gearing up for another year characterized by spending to revive economic growth. Development of non-oil sectors continues to be the common theme among GCC budgets, as GCC economies remain upbeat regarding revenue inflows, with oil prices projected to increase in 2019.

View the full briefing at Marmore Mena Intelligence.

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Sustainability in Credit Under the Spotlight

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This partner content is by MFS Investment Management.

by Lior Jassur, Director, Fixed Income Research – Europe, and Melissa Haskell, Director, Fixed Income Research – North America

In brief
Integrated approach — Incorporating environmental, social and governance (ESG) factors in the fixed income investment process is best done by embedding ESG analysis in the credit analysts’ and portfolio managers’ research process, rather than relying on exclusions or investment decisions based on external providers of ESG ratings.

Materiality and time horizon — The complexity of markets requires that investors determine the potential materiality of ESG risks and opportunities as well as the timeframe within which they are expected to have an impact on borrowers’ credit quality.

Active management — Due to the changing nature of ESG factors and their effect on investee companies, we believe that active managers are well suited to assessing ESG risks and opportunities. Incorporating ESG factors allows for an understanding of borrowers from the viewpoint of various stakeholders and provides a means of engaging with management.

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Disclaimer
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

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