Complete guide to ABOR and IBOR - Accounting & Investment Book Of Record

Investment Booker Record or IBOR for short, is actually a very simple concept. It is giving you the ability to see your portfolio from any type of assumption you want, depending on who you are, what role you have, or what the use case for the portfolio is. Now, the term itself can has become a bit unclear what it means and that is because vendors that don't have an EYBOR claim to have one. The definition of an EYBOR is actually very clear. It was defined in 2014, but vendors that don't adhere to that standard still claim to be one. So in this video I'm going to walk you through what an EYBOR is. The three generations of ibors and there really is only one which is the third generation that is the true eybor who but since the terminology is being used a lot then it's probably easier nowadays to think about eyeboards as three generations and then instead bucket the eyeboard. Think about everything as an eyeboard and bucket them into one of those three generations. And I'll walk you through all of those three generations and how to easily spot which one you are potentially evaluating. And then we'll get into the use cases of the Generation 3 Ibor, how it works, how it's meant to work. And I'm going to cover what are other types of books of records, accounting book of record, custody performance, abor, cbor, et cetera, what they are, how they relate to the ibor. And then finally we are going to look at how an IBOR might fit into your operating model. So is it part of a system? Is it part of multiple systems? It's a standalone system. Can it be either of those? And what are the implications for you as an investment manager? So let's get into it. IBOR Generation 1 or flush and fill system is essentially a system that takes a position or cache view from an accounting accounting system or fund admin. It reads it into the first generation IBOR plus and fill IBOARD system and then, and that happens start of this start of day, positions go into the first generation IBOR and then every night it's thrown away, flushed and then filled again, which is why it's called the flush and fill system. And then this intraday view is adjusted so various adjustments are applied for orders, sometimes for subscriptions, for corporate actions, etc. And then some of those adjustments are actually still relevant the next day. So good to cancel order, for example, that's not if filled, a future core protection, etc. So when the new view comes in, it needs to be readjusted for all of those things. In the first generation hybrid, it was created because in theory it is easier to maintain. There's just take the view, basically you apply some adjustments and that is it. However, it's actually not easier to maintain because it's really complicated to understand which adjustments are applied, should be applied and what you get from the accounting system. Settlement failure, has that been included or probably not included right in that case, but there's no adjustment for it. So can we trust cash? No, we can't. We just can't. It's fact. So that has all sorts of implications on cash buffers, which are performance, etc. And the first generation Ibor or flush and fill Ibor, it's not, it's not an eyeball actually. It's not a book of record because it can't be used as a book of record. You can't use it for downstream things like performance calculations or reporting. You throw it away every night. And it also can't function as a duality check because you're taking data from a fund admin or an accounting system, reading it into the I board and do you want to reconcile that data back? But it already came from that source. It can't be used for duality essentially. So there's very little value in this model and has a lot of complications. And it's actually not even easier to maintain than to maintain a standalone proper book of records. So there's no reason anymore to run such a system. And it's not again, it's not an eyebor at all. We cover it here because some vendors that are flush and fill systems, they will claim to be an eyebore. So if they do, it's probably just easier to think about these three buckets and then categorize them as okay, they're generation one instead of trying to figure out who is an Eyebor, who isn't, etc. But since these limitations were there, a second generation of Ibors came along. The second generation Ibor is actually quite similar to the first one with the biggest difference in that it builds up the positions and cash from transactions itself. And it does so by using yesterday's view of the portfolio, applies everything that has happened since and creates a new view today, which is then the current view of portfolios. So it's now independent of an accounting system or fund admin, which is the biggest benefit of the IBOR generation 2 compared to IBORgeneration 1. In fact, often an eyeboard generation 2 can be an accounting system and to that End it is usually complete. What I used to call it, I usually call it eventually complete. So a accounting system can't be missing things. It must have all of the information, so it must be complete. But it is in no rush to be complete. It needs to be complete by the time that we close a period. So that's why I call it eventually complete. It's usually not complete. Intraday real time. It's fine if some posts arrive a day or a week later even sometimes just needs to get there eventually. The benefit with the generation two IBORG is that not only can it serve as the standalone system, but it can then also be used for reporting performance calculations, etc. Now it still has significant drawbacks. The the main one stems from the fact that it holds one time series, usually the accounting time series. So there's one series of this one position time series which is the nav time series or the accounting time series of each portfolio. That means that anything that the front office sees, for example intraday, is just adjustments again. And you have that same problem with the adjustments. And some generation two eyeballs, they do adjustments better than others. They might still struggle with rolling up future exposures, not only cash into the future cash ladder, but exposures into the future. Which might be a problem if you have a discrepancy in settlement days of changes that you're making to the portfolios. Some buys themselves and have different ones which can be the case just in, in, in liquid markets, but in public markets, but also when trading, investing in fund of funds and if you're, you're an lp, you might even have deal dates that you're working towards far into the future and then being able to simulate redemption in one fund to finance something else that you haven't committed to, but you put a trade into the future, etc. These sort of things becomes very challenging for a second year generation Ibor. And also adjusting for just cash or simulated trades even in public markets can be a severe limitation. Which is why the third generation iBorg was born. So the third generation iBorg is very different from the first two. It doesn't store positions or cash at all. It builds the portfolio up on the fly, which is why it's also called a live extract. It extracts the positions and cash live from the historical record of transactions that happen. And this means it's incredibly powerful. It can create any view or portfolios instantly that you might require instantly, meaning within milliseconds. So there shouldn't be any delay of waiting for a process. It doesn't matter how many transactions there are, shouldn't be delayed and it's not usable anymore. So that needs to be requirement. And the views that it can create is for example, well, it can create the accounting view, the nav view. So you request everything that has been that goes into that view. You got it. Do you want the settled cache to reconcile against custodian? Ask for that, A couple of milliseconds later you have it, you can run that reconciliation. Do you want to see simulated things and preliminary deposits in the front office? Request it and you've got it. The most common concern about an ibrohineration 3 is the data maintenance. So the common question is, doesn't it require more maintenance than for example the second generation investment booker record? And it actually doesn't. They both need to be completely complete, so both needs to have all information. The generation two is not in a rush to get there. The generation three would like all information, all data possible as soon as it's available. That's usually quite straightforward to solve. When the information is available, it might not be known to what certainty something happens, but the IBO generation 3 solves that by having the state concept about how certain is something. So you enter and a preliminary subscription and it's marked as preliminary. And then when you extract the view you just select do you want preliminary or confirmed cache? And then it's in there or it's not in there, depending on what you selected. So it's actually not more maintenance with the Generation 3 iBoard than a Generation 2 Eyebor, or not even a Generation 1 Eyebor for that matter. The maintenance is the same in the end, but the value that you get from generation three iboards just incredibly vast. Limina is one of, to our knowledge, two vendors that provide a generation three ibor. And if you want to learn more about the capabilities of our Eyebor, you can follow the link here and learn more. The way the third generation IBOR works is that it has two concepts. One is time, one is state. So time you tell the eyebor, the engineer for the eye board, which point in time do you want the portfolio at? If you request a range, a time series, it's going to do a request for each time in that time series. So let's just use one of the dates as an example because it's easier when walking through it. So you select the time and then you select the state. State meaning transactions at what certainty level should be included or not. And the eyeboard then goes out and fetches all transactions since beginning of time with that certainty level or state that you provided until the time you provided. And it then calculates the positions and cash per that date from all of the history. That's as simple as that. Now there are a couple of things to mention around the state specifically. So first explaining what are states. The easiest way to think about it, at least in my view, is that if you start from simulated, that includes everything. So anything that the portfolio manager simulated and what happens since in market things and et cetera, et cetera. And then as you go down you sort of remove information. So if you go to pre trade then you exclude what is just simulations that the front office are playing around with. And then you go one step down and you exclude the things that haven't been routed to market. So now this is working. So orders that have actually been committed to and then you go down and sort of just look at what has been executed. So for a listed equity, for example, if it's filled to 20%, it's going to then just include those 20% and ignore the other 80 because they are still working and so on. So the state is sort of a everything included and then removing things. And the second thing to understand about states is that there are two ways to model states between investments and cash. So the original definition of investment book of Record or IBorgeneration 3 that was published in 2014, it uses one state for both of them, which means you can't combine a preliminary cash like a subscription with a state further along on the investment side. And at limina we think that you should be able to because we are coming across some use cases where that is relevant to do so. In limina specifically you have two states, one for cash and one for the investments and you can combine them. So in limina you choose two states and the date and that's the input you give to the IBOARD to then get the portfolio view that you want. And last thing to mention is that this isn't a batch process, at least not in limina. So you don't request a view, you get it and then you have to re request it and get a new one. You can subscribe to it. So you take all those three settings and you subscribe to that view. So you can subscribe to the real time view. So time is then now and five seconds later it's still now, it's not five seconds ago and the states as well. So any transactions that come in recalculate the view and you get a new view immediately. So it's useful for intraday monitoring. It's not the best batch. Basically, you have to refresh and get a new one when you need it. The definition of investment book of record generation three is actually very clear. It wasn't even defined as Generation 3. It was defined as the IBOR standard in 2014 by a consortium of asset managers. Now what happened was that that technology was incredibly expensive and difficult to build, especially for vendors that already had a generation one or two to build the third generation one. So instead of embarking on a huge R and D project, those vendors embarked on a marketing project to convince the industry that what they had was an investment book of record. And this is why the term IBOR is now very. It's not unclear, it's actually clear, but it's used for things that it's not defined to be. And this is also why we believe now it's easier to call everything in IBOR and then divide them into these three generations, because that's how people actually use it in the industry. So IBOR in daily usage within this industry actually just means a position and cash view. So if you look at those three generations of ibor. So the first one, the flush and fill IBOR, or flushed and filled position and cache view, and the second one, the rolling balance IBOR or rolling balance, position and cash view. And then the third one, a live extract IBOR, or live extract, position and cash view, all of these are position and cash views. They just go about position and cash views differently. And that's probably a more pragmatic way of approaching the definition. Even though as it should be or it is defined, the third generation is the only true ibor. So now that you understand what an IBOR is, how does that relate to the other books of records? The accounting book of record, AB custody, CBOR performance, pbor, starting with accounting book of records. So accounting book of record usually means where does the accounting statement or the nav time series live? That could be within the same system as where the eyeball lives, because the eyeball can actually service as the aboard. So if you remember the second generation of eye board that we covered, it's the rolling ballast, usually nav time series. So and the eye board can just create those on the fly with the right settings on states. So the eye board can replace the aboard, but not vice versa. The ABOR can also be external. It can live in a separate accounting system from the abor, or it can even live with a service provider like a fund admin, in which case the ABOR is reconciled against the abor. The CBOR custody book of record usually lives within at custody. So the IBOR creates the custody view and is reconciled against the cbor. But the CBOR technically is separated and lives at the custody. The IBOR generation 3 makes it easier to reconcile your data against the custody. And the performance book of record is what's used for performance calculations. The IBOR can replace the performance book of record, but if you don't have generation free ibor, usually the PBOR performance booker record needs to be a separate system. Let's look at how the IBOR relates to the operating model you have as an investment manager. The operating model for an investment manager basically just means how does your system landscape look for the investment management workflows? To the left here we have what is called an all in one system or a front to back system. We have one system that covers most or all of the functional capabilities you need in the front, middle and back office. And then to the right we have the opposite, which is a best of breed system, which means that you have one system for each functional capability and then you have to integrate them with each other. And it's a grayscale, so you have potential operating models in between. The challenge with the best of breed model is that most of these systems require a book of record. Could be generation one, two or three, most of them requires one. And the challenge with the front to back model is that the front to back system will require book of record as well. And now it's very important which type of book of record that is. It really needs to be at least the second generation because the third generation you don't have the duality checks, you can't use it to reconcile. You can't operate your system without that start of the position working. So you're taking extreme operational risk. If that were to be a generation one iBoRrant doesn't even really work. It can't function as an accounting new for example. So it needs to be at least generation two. But ideally it should be generation three. The challenge with that is that to our knowledge, when this video is being recorded, there is actually only one provider that is a front to back solution built on a generation three ibor, which is Limina. And if you want to check out more about what we do, you can follow the link here to our website. You can learn more about the product, the capabilities and the types of investment managers that we service. My name is Christopher, I'm the CEO of Limina. I publish content regularly to help investment managers around their operating model, technology, evaluating vendors, etc. I do that on my LinkedIn, which you can find here. Please feel free to connect with me there.