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Operational limitations holding back investment managers, says Morse

Investment managers want to use a wider range of derivatives in increasing volumes but the majority are being held back by operational limitations, according to a new survey by Morse.

Almost 60 per cent of respondents to the survey said they used multiple sources for valuing their OTC derivatives portfolios, and a staggering 42 per cent used three or more sources.

Morse says the most popular valuation sources were specialist providers and internal spreadsheets but other methods included counterparties, internal specialist systems and hedge fund administrators.

When asked what the main reasons were why their company has not outsourced any OTC derivatives operations, 45 per cent said it is due to a lack of availability of suitable providers and a further 55 per cent cited a lack of business or financial benefits.

Morse consultant Chris Sier says: “These results highlight the inability of outsourcers to provide a suitable level of service for OTC derivatives at an attractive price. Full capability can be found in prime brokers, boutique hedge fund administrators and investment banks but these all have their drawbacks. Prime brokers are very expensive when used at scale, hedge fund administrators lack scale and perhaps credibility in the institutional market and investment banks have yet to decide whether they wish to enter the market.

“There is a potentially huge market for an outsourcer who can develop the necessary systems to cope with investment manager demand for derivatives. Such capability could also be used as a loss leader to win wider mandates, such as full fund administration or custody contracts. Many outsourcing providers are currently working on this and we expect a credible provider will not be long to emerge.”

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