Investment managers are taking outsourcing to the next level by hiring asset servicing banks to handle middle-office functions, which are typically all of the post-trade execution services.
Pressure for cost savings in a low-return environment, increased regulatory scrutiny in the face of the mutual fund scandals and interest in transferring risk are the three main factors driving outsourcing from the back office to include the middle office.
Recent deals that have included outsourcing middle-office functions:
• Bank of New York was hired by RCM (UK) Ltd., London, in September;
• State Street Corp., Boston, was hired by Allianz Dresdner Asset Management, Munich, in September and by Investec Asset Management, Cape Town, in June;
• Mellon Financial Corp.'s Mellon Global Securities Services, Boston, was hired by TIAA-CREF's new TIAA-CREF Asset Management in July; and
• Northern Trust Co., Chicago, was hired by Julius Baer Investment Management LLC, London, in June.
"We hope to realize significant operational efficiencies across the board through this outsourcing partnership," said Michael Hooper, chief financial and operating officer of RCM, in a news release announcing the Bank of New York deal.
Different firms define the middle office differently, but most often it includes such functions as trade processing, post-trade compliance, portfolio accounting, performance measurement and attribution, trade reconciliation and handling corporate actions such as stock splits or spinoffs.