As markets continued to pummel the bond spreads of Ireland in 2010, the Dublin government came up with a plan. A four year, 140-page recovery plan; practically a leaflet compared to the novels of Dodd-Frank or Volker, but a plan nonetheless.
As markets continued to pummel the bond spreads of Ireland in 2010, the Dublin government came up with a plan. A four year, 140-page recovery plan; practically a leaflet compared to the novels of Dodd-Frank or Volker, but a plan nonetheless.
Swiftly emerging as a favoured destination for distressed debt investors, creditor-friendly Irish laws, and the country’s lending binge, meant that cheap assets should have been in plentiful supply.
However, the scheme devised by the EU and IMF to save €15 billion was underway, with economists calling it “staggeringly austere”, and David Begg, head of the Irish Congress of Trade Unions, lamenting: “It appears that the day of reckoning has arrived. The Barbarians are at the gates.”
Domicile of choice
Despite Ireland being hit with a plan that was forecasted as making it impossible to attain predicted 2.7 percent growth from 2010-2014, Ron Tannenbaum, managing director at GlobeOp Financial Services asserts that active interest has resumed in Dublin following the downturn. “Europe is becoming a key onshore regulated market as more funds prepare to re-domicile there to access investors. Last year we expanded our Dublin office in response to increased demand from funds based in or extending into Europe.”
He predicts continued European market growth in areas such as large complex portfolios and managed account platforms, but comments that the AIFMD could be the next hurdle for the onshore industry and Dublin.
Tricia Riddell, global head of product, transfer agency, Bravura Solutions, says that the AIFMD is likely to result in more fund managers potentially looking to outsource administration of their funds. “Administration is not core to their businesses and with regulatory burdens increasing all the time, fund managers are thinking about where they want to expend effort and money— often it is simpler to outsource.”
The stated purpose of the AIFMD is to anticipate systemic risk and provide the appropriate level of investor protection. However, Tannenbaum argues that as currently written, it would lead to a concentration of risk and is also anti-competitive, as it gives an advantage to banks—who can act as depositary and administrator—over specialist, independent administrators. “By legislating the concentration of service functions with the depository, the AIFMD is concentrating the risk that any fund has on a single counterparty, rather than diversifying the risk as was originally intended. It also represents a greater threat than hedge fund administration sector consolidation to the choices fund managers and investors will have.”
Country head for Ireland at Northern Trust Hedge Fund Services Clive Bellows states the near-impossibility of definition, due to the final draft not being released. “Firstly it’s important to note that the final draft of the AIFMD is delayed. The biggest challenge right now is that until the extent of the regulation is known it is not possible to fully define how all clients will be impacted. We look forward to a final draft. That aside, it is safe to say that one of the main tenets of the AIFMD will mean that everyone is going to have to be a lot more transparent in reporting and as a result we see an increasing demand from our clients for risk management and reporting solutions. I think individual organisations trying to lobby AIFMD has little effect —the way to do it is through industry bodies and associations. In Ireland, we work closely with the IFIA, and I think they’ve made a good effort in representing views from the industry when it comes to the AIFMD.”
Tannenbaum adds that further requirements of the directive exceed current UCITS regulation, which would impose considerable additional burden on participants, with Riddell commenting that she expects to see some consolidation in the industry where smaller groups decide that regulations are too burdensome to cope with alone.
The right amount of demand
When asked if asset managers becoming more demanding of their administrators, Bellows describes asset managers as “eminently sensible”, stating: “As asset management businesses, and investment products and strategies evolve, more demands are being placed on asset servicers. A good example would be the need for regulated funds to produce KIIDs and solutions to support UCITS IV requirements. A large number of clients have come to us and said, ‘you’ve got the data; can you produce the KIIDs for us.’ That is a sensible use of resources.”
However, other industry insiders have acknowledged that, however reasonable asset managers are, there is an ever-increasing pressure on administrators to deliver more for less. Riddell comments: “These days it is more than just running a register; trade processing, cash management and servicing the investor. Providers need to extend the scope of their services and provide more as a core TA solution than that which was previously expected.”
As investors insist on more meticulous reporting, more transparent governance, and confirmed operational risk management, alongside an onslaught of regulatory requirement, it seems inevitable that administrators are having to buckle down to a heavy workload.
Additional services looked for now include corporate secretarial services, management accounting for European-based funds, and risk reporting, with more basic functions of share registry and transfer agency services, and investor communications still in demand. “More generally”, Tannenbaum asserts, “fund managers increasingly want information faster—as close to real-time as possible—to support daily trading strategies, collateral, risk and portfolio management. They expect all these services to be fully integrated into annual SOC 1 (formerly SAS 70 Type 2) examinations.”
24 hour party people
It seems essential that fund administrators become 24 hour providers in an industry that has rapidly globalised, and Riddell acknowledges that real-time data is a white-hot topic. “Standard services provided include web portals for distributors and investors to not only access data online, but to trade real-time 24/7. Clients are looking for the core services to be extended and include areas such as efficient cash flow forecasting.”
Bellows was in agreement, seeing the necessity of 24-hr providers as well as a standardised platform. “I think anyone who isn’t global is going to struggle—but it doesn’t stop there. Anyone who isn’t on a single operating platform will have significant problems. If you’re operating across three different time zones and platforms, you may as well have three different providers. One of the things I’m very proud of at Northern Trust is that we have the same platform right across the world. It doesn’t matter if your portfolio is managed in Australia, Hong Kong or New York, all of our processes are the same.”
Fund administration is no longer simply about offering the month-end functions of net asset valuation and share registration. As Tannenbaum said: “If not yet 24/7, at least 24/5. It now encompasses everything that happens after the trade. Funds with managers trading in multiple time zones and countries increasingly want information faster—as close to real-time as possible—to support daily trading strategies, collateral, risk and portfolio management. Investors, regulators, valuation committees and auditors are also requesting more—more data, more detail, more frequently.”
Consolidation and competition
The financial crisis touched every part of the asset management industry, and independent fund administrators were among the worst affected. Unlike custodians, which carry out other functions for client assets they have been mandated to safeguard, they had no other income to fall back on. Automation and a broad range of products seem to be key, with established boutique and mid-tier companies with multiple offices holding strong, and smaller firms tumbling off the precipice.
Comments Tannenbaum: “Third-party administrators have a unique bird’s eye view of their fund clients. They are ideally placed to produce the independent reporting investors, boards, auditors and regulators now require. However, only a handful—GlobeOp among them—have the platform, processes and scale necessary. We therefore expect more consolidation in the fund administration sector. The strong who offer quality service, scale and advanced technology will continue to grow. Their challenge will be to remain nimble and creative in responding quickly and cost-effectively as client and regulatory requirements and opportunities evolve.”
“Competition remains fierce”, concludes Bellows. “I don’t think it’s possible to speculate around what the future may hold, but I’ve always believed there will be a viable gap in the market for competitiveness. We are incredibly committed to Dublin and Luxembourg and we’re seeing investor confidence here as remaining strong. We couldn’t be more bullish about Ireland.”
