Regulatory reporting is obviously very high on the agenda of all money managers. What are the main challenges in this area today, and what is your approach to address them?
Multiple regulations require reporting on a vast amount of data of inherently different nature. For example, the Money Market Funds Regulation (MMFR) and Alternative Investment Funds Directive (AIFMD) both require descriptive information relevant to the fund manager, invested assets, as well as calculated risk information.
The diversity and sometimes complexity of assets as well as processing tasks has led to specialisation and to co-existence of different sub-systems handling different needs for specific asset classes (for example equities, interest rate instruments, derivatives, private equity, etc) and processing needs (for example, investment accounting, risk management, limits management).
Given that many money managers utilise different subsystems for different tasks, such reporting requires interfacing with each sub-system in order to retrieve the required information and to merge it together in a single report. This is not merely an IT task; it is common that each system has a different representation approach so human interpretation is often required in order to link identical objects.
In this context, regulatory reporting is typically a multi-step process:
- Gathering of information relevant to the manager and assets, ideally in an automated manner from each sub-system
- Matching of collected attributes across sub-systems to make sure that the information related to each entity is complete
- Execution of risk and other calculations where needed
- Integrity checking and reconciliation
- Production of the report in the form required by the regulator (typically XML form)
But wouldn’t it be great if a central database existed within the portfolio manager’s or service providers organisation containing all needed information? This is precisely the purpose of our RiskValue investment management platform: To act as a rich data warehouse, complete with both raw data and derived risk calculations. So, for our customers the risk reporting process is no more than extraction of needed data and re-formatting on the output form prescribed by the regulator.
And of course, the benefits of such a system go well beyond regulatory reporting. The portfolio manager and service provider can monitor investment limits, internal risk reports, calculate valuations, profit and loss, fees, performance and other computations produced by other systems (for example fund accounting), act as a backup to any failed service provider, and many more.
The lack of standardisation typically inherent in alternative asset classes, causes serious difficulties for the development of systems capable of addressing the risk management needs of both financial and different alternative asset classes. How has SYSTEMIC managed to develop such a system?
Risk calculations for financial portfolios often involve complex modelling in order to calculate sensitivities to different risk factors, and potential losses under statistically adverse scenarios (i.e. value-at-risk and stress tests). On the other hand, there is usually substantial research and documentation in order to design a system for performing required calculations. In addition, a good design hopefully will allow us to replicate these calculations to other portfolios as well. But it is true that for real assets things are different. The calculations involved are usually less complex but each portfolio and each asset typically requires its own approach for any risk calculation to make sense. Overall, the same high-level risks need to be calculated, for example, operational, market, credit, counterparty risks, but more thinking needs to take place in each case, both for deciding on the appropriate modelling/measurement approach and also for finding the data needed for calculations.
At SYSTEMIC we have invested heavily in designing a platform ready to accept a vast amount of asset classes and descriptive information separately for each asset class. To this effect, we designed a separate environment for a large number of alternative asset classes including all possible characteristics that might be needed for any calculation to take place. For example, these may include detailed characteristics of real estate investments, private equity investments and many others.
This design approach is very different from an approach of treating investments as ‘generalised objects with attributes’. The latter is less costly to implement, and might be sufficient for an accounting system, but it will have serious limitations when performing risk calculations.
So again, the difficulty with alternative assets is more relevant to data organisation and availability rather than running complex algorithms, although a thorough understanding of the underlying business and investment objectives are absolutely necessary. But once you have figured out the most relevant risk model to apply, you need to have the right data in place to feed your algorithms. So, we placed special emphasis in developing a system with an extra-rich data universe, and figuring out how to complete it regularly in an automated manner since the early stages of any customer implementation.
In the current pandemic environment, where physical meetings are discouraged, how do you approach new customer on-boarding and know-your-customer (KYC) issues, from a systems point of view?
Even before the pandemic, there was a clear market need for a web portal facilitating the remote onboarding process. So, we were already prepared for such a system automating and controlling the submission of documents by the customer, subsequent management by the portfolio manager while carrying out KYC-anti-money laundering verifications and completing the approval processes in a custom manner.
Following the pandemic, this system has gained popularity as it allows our customers to continue accepting new customers within the current heavily regulated environment, and growing their business with personnel working from home or remote offices.
As a natural extension of this system, we added new functionality to it allowing investors and managers to remotely view numerous dashboards, profit and loss statements, limits reports and many others.
It appears that in the current pandemic environment, more investment managers and service providers are seeking to outsource a number of processes including risk management and regulatory reporting. Other than systems, do you also offer such services to your customers?
Yes, we do. For many years we have been offering risk management services on an outsourced basis. This involved our assistance in setting up a proper risk management process (including formal documents submitted to the authorities) relevant to the fund manager and the fund itself, and subsequently proceeding with the tedious tasks of data collection (usually from the administrator), reconciliation, risk calculations, limit checking, and risk reporting. Both financial and alternative funds are on the agenda, the latter offering more challenges particularly to managers with limited experience in a new asset class. During the pandemic the market has understandably become significantly more cost conscious, anticipating volatile markets and needs. In this context, many chose to keep to a minimum the number of fixed personnel, and prefer to outsource as many ‘non-core’ tasks as possible to other specialised service providers like ourselves. In our view, this approach makes a lot of sense for our customers as they can free up resources for investment management tasks without the headache of risk management and regulatory reporting.
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