A centralized trading approach forms the backbone of the recently revamped British Columbia Investment Management Corp., offering a more protective process for its stakeholders, according to Carmen Firmani, senior manager of client relations at the BCI, speaking during the Canadian Investment Review’s 2023 Risk Management Conference.
She detailed the BCI’s transformation from a passive to a more active investor, spearheaded by Gordon Fyfe, the organization’s chief executive officer and chief investment officer. “We see, at BCI, full segregation of duties as an essential best-in-practice way to protect investors from a risk management perspective, but also from a best execution perspective.”
The risks associated with the BCI’s previous approach — a decentralized trading process — became too great for its leaders, she added, noting this approach can bring reputational and operational risks. “A key example here is dividing the trading portfolio management and back-office functions. They require different skill sets and if you don’t divide them up you risk errors in your operations.”
The U.K.’s Financial Conduct Authority requires investment organizations to implement a decentralized approach, so that individuals or teams share responsibilities. “If you give a single individual or team complete control over a process, it can expose you to risk and, of course, binding the firm is the largest risk,” said Firmani. “Therefore, separating the responsibilities of a centralized group of traders is an important internal control.”
As part of its transition, the BCI kept a track record of the entire process and created a white paper to present the industry, which it published in 2022. “Our goal really was to continually improve and to speak with others who are following a similar path. We think, if others follow this path, it would be a benefit to the industry as a whole.”
When the investment organization was taking a decentralized approach, it risked trading more often than was necessary and consuming more than was required for research and data services, she said. In addition, there was a risk of conflict of interest in allocating trades to broker partners. Governance in a decentralized model can also present significant risks, she added, pointing to concerns around legal, reputation and operational affairs.
In pursuit of better oversight, the BCI also implemented its centralized approach for its derivatives program, which didn’t even exist a decade ago. “When it comes to derivatives, you can imagine having one central point of control on a cross-asset basis is very beneficial because we’re trading in huge size.”
The solution for the BCI was to centralize the equity trading derivatives, securities lending and beta portfolio management, said Firmani.
The BCI had outdated trading systems and general technology with limited compliance checks, she admitted, but it was a blessing in disguise because it allowed the investment organization to implement new technology.
Read more coverage of the 2023 Risk Management Conference.