In the spotlight
03 June 2015
Experts from Pacific Fund Services and RBC Investor & Treasury Services discuss how automation could be the key to a cleaner back office
Image: Shutterstock
What can asset managers do to comply with the swathe of regulatory reporting coming in to effect in Europe?
Keith Parker: As a general rule, asset managers are not in a position to decide whether or not to comply with regulatory reporting requirements, short of actively avoiding being domiciled in a particular location. The issue is rather how to effectively manage this challenge without losing focus on their core competency—managing assets. We would argue that outsourcing this regulatory burden is likely to be the most sensible strategy. We have clients that are now providing an alternative investment fund managers directive (AIFMD) Annex IV reporting solution to their asset manager clients. The nature of the Annex IV reporting means that a very sizeable percentage of the data that needs to be reported on resides with the administrator. These administrator clients in turn have approached us to assist them through their usage of our fund accounting platform, PFS-PAXUS.
In terms of the regulatory reporting that we have built, a solution for the AIFMD Annex IV reporting undeniably poses the biggest challenge mainly around the fact that it is so cumbersome. There is just so much data that needs to be reported on. That said, we have built what we like to think of as a very easy-to-use and elegant solution for our fund administration clients to deal with this challenge.
Sébastien Danloy: Regulatory change continues to proceed at a great pace and as a result, the cost and complexity of regulatory compliance looks set to continue to increase. For example, asset managers will need to examine the impact on their operating models and IT systems, the demands for greater and more detailed reporting, the identification of underlying investors, repapering of contracts, and more. In-house teams, such as legal and compliance, and operations, are under increasing pressure and resources are being consumed away from the core investment management capability of the asset manager.
In this context, outsourcing to service providers can be an effective way for asset managers to tackle compliance with regulation. Asset managers can leverage the shared experience (and mutualised costs) gained from service providers working with multiple clients and across multiple regulations, as well as benefit from the use of developed operational solutions and requirements for areas such as reporting.
Effectively managed regulatory change is a partnership, as both partners must adapt to evolving regulations and challenging market conditions. In many cases the regulations require both parties to work together to determine roles and responsibilities, and may include data collection and reporting requirements or changes to processes.
While there are several large and potentially complex regulations currently having to be worked through, it is difficult to say which regulations pose the biggest challenge as this depends on the profile of each individual asset manager, their level of understanding and preparation, and the support of their service providers.
How important is the adoption of new technologies in back-office administration?
Danloy: Embracing technology is critical to our clients and our ability to serve them—helping them to better manage their processes, improve their operating models, and ensure there are no errors when trades are settled on time, net asset values are calculated, and data is managed. Clients also want the interaction with their service provider to be as seamless and simple as possible, and for access to the data we hold on their behalf to be straightforward and timely.
Asset managers are increasingly required to dedicate more time and resources to managing stricter reporting and accountability requirements as a result of increased regulation and scrutiny. As a result, the profile of middle and back-office functions within asset managers has risen and custodians have responded through services aimed at helping them meet their obligations.
Innovation and increased use of technology can also help businesses to manage operational risk and improve efficiency by reducing human error and standardising processes, for example with straight-through processing.
Parker: Back-office administration, by its very nature, is perfectly suited to be automated. It is repetitive, often very complex, data intensive, and has a lot of underlying moving parts. Using technology in the first instance in this environment is crucial if an administrator wants to be both efficient and accurate. An excellent administrator will not only maximise the use of technology but will also constantly seek out new and improved technologies, continually pushing the boundary of what is achievable in terms of automation. Of course, all of this comes at a cost, so this is a crucial part of the overall operational challenge facing an administrator.
Are you seeing an increase in real estate investment funds, or in any other asset type? Why is this happening now?
Danloy: In terms of assets under administration, RBC Investor & Treasury Services is the largest asset servicing provider in Luxembourg for offshore real estate funds, with a 39 percent market share. In both Luxembourg and Dublin we are seeing a boost from growing institutional investor interest in alternative asset classes, especially real estate, but also private equity and alternative hedge fund strategies.
Alternative investments continue to attract institutional investors. The continuing low rate environment and ongoing depressed yields in traditional asset classes are significant challenges for investors, who, as a result, are increasingly looking at alternatives to achieve the returns they need to meet their liabilities. A report published by Mckinsey & Co in 2014 estimated that three-quarters of investors expect to maintain or increase their investments in alternatives over the next three years.
This trend has been supported by an increase in new or revised vehicles and structures, such as the Investment Limited Partnership in Ireland and the Special Limited Partnership in Luxembourg.
Parker: Over the last three years or so we have seen a significant emergence of the automation of private equity fund structures. First, retail and mutual funds were automated, then hedge funds and now private equity funds.
One reason for this is the growth of private equity as an asset class, meaning that there are just that many more of these fund types around.
Private equity asset managers have seen how successful automation has been with retail and hedge funds, and sensibly questioned if this could also be true for the types of funds that they manage. These types of fund structures are now better understood by administrators, for example, which fuels growth in the usage of technology in managing and administering these fund types.
How do administration requirements differ for real estate and alternative investment funds?
Danloy: Alternative funds, including real estate funds, have more complex underlying assets, which lead to different valuation frequency and accounting entries, and different demands fon transaction documentation and support to traditional UCITS funds.
Alternative funds often have more complex multi-jurisdictional structures that need support, and with them transaction and cash-flow monitoring requirements.
The domiciles of Luxembourg and Ireland are both home to exceptionally strong regulatory and service provider infrastructures which are well-suited to the greater complexity of handling real estate and other alternative investment funds.
What trends do you anticipate appearing throughout the rest of 2015, and beyond?
Parker: We believe much of the same, in terms of what has transpired over the last few years; more regulatory scrutiny and a continued demand for the automation of processes within the funds industry.
Danloy: Investor protection, and alongside that, increased scrutiny and regulation of the asset management and custody sectors, will remain key themes for the foreseeable future. There will be greater demands on fund administration in terms of reporting and transparency for valuation and pricing. Transparency in general is a growing trend, notably concerning taxation, and this is supported by regulatory initiatives.
Another trend is likely to be technology and how it will continue to influence the shape of the industry, from identifying and tackling new distribution models and how they are supported, to how the industry can learn from other sectors in areas such as cyber-security and effectively exploiting ‘big data’. AST
Keith Parker: As a general rule, asset managers are not in a position to decide whether or not to comply with regulatory reporting requirements, short of actively avoiding being domiciled in a particular location. The issue is rather how to effectively manage this challenge without losing focus on their core competency—managing assets. We would argue that outsourcing this regulatory burden is likely to be the most sensible strategy. We have clients that are now providing an alternative investment fund managers directive (AIFMD) Annex IV reporting solution to their asset manager clients. The nature of the Annex IV reporting means that a very sizeable percentage of the data that needs to be reported on resides with the administrator. These administrator clients in turn have approached us to assist them through their usage of our fund accounting platform, PFS-PAXUS.
In terms of the regulatory reporting that we have built, a solution for the AIFMD Annex IV reporting undeniably poses the biggest challenge mainly around the fact that it is so cumbersome. There is just so much data that needs to be reported on. That said, we have built what we like to think of as a very easy-to-use and elegant solution for our fund administration clients to deal with this challenge.
Sébastien Danloy: Regulatory change continues to proceed at a great pace and as a result, the cost and complexity of regulatory compliance looks set to continue to increase. For example, asset managers will need to examine the impact on their operating models and IT systems, the demands for greater and more detailed reporting, the identification of underlying investors, repapering of contracts, and more. In-house teams, such as legal and compliance, and operations, are under increasing pressure and resources are being consumed away from the core investment management capability of the asset manager.
In this context, outsourcing to service providers can be an effective way for asset managers to tackle compliance with regulation. Asset managers can leverage the shared experience (and mutualised costs) gained from service providers working with multiple clients and across multiple regulations, as well as benefit from the use of developed operational solutions and requirements for areas such as reporting.
Effectively managed regulatory change is a partnership, as both partners must adapt to evolving regulations and challenging market conditions. In many cases the regulations require both parties to work together to determine roles and responsibilities, and may include data collection and reporting requirements or changes to processes.
While there are several large and potentially complex regulations currently having to be worked through, it is difficult to say which regulations pose the biggest challenge as this depends on the profile of each individual asset manager, their level of understanding and preparation, and the support of their service providers.
How important is the adoption of new technologies in back-office administration?
Danloy: Embracing technology is critical to our clients and our ability to serve them—helping them to better manage their processes, improve their operating models, and ensure there are no errors when trades are settled on time, net asset values are calculated, and data is managed. Clients also want the interaction with their service provider to be as seamless and simple as possible, and for access to the data we hold on their behalf to be straightforward and timely.
Asset managers are increasingly required to dedicate more time and resources to managing stricter reporting and accountability requirements as a result of increased regulation and scrutiny. As a result, the profile of middle and back-office functions within asset managers has risen and custodians have responded through services aimed at helping them meet their obligations.
Innovation and increased use of technology can also help businesses to manage operational risk and improve efficiency by reducing human error and standardising processes, for example with straight-through processing.
Parker: Back-office administration, by its very nature, is perfectly suited to be automated. It is repetitive, often very complex, data intensive, and has a lot of underlying moving parts. Using technology in the first instance in this environment is crucial if an administrator wants to be both efficient and accurate. An excellent administrator will not only maximise the use of technology but will also constantly seek out new and improved technologies, continually pushing the boundary of what is achievable in terms of automation. Of course, all of this comes at a cost, so this is a crucial part of the overall operational challenge facing an administrator.
Are you seeing an increase in real estate investment funds, or in any other asset type? Why is this happening now?
Danloy: In terms of assets under administration, RBC Investor & Treasury Services is the largest asset servicing provider in Luxembourg for offshore real estate funds, with a 39 percent market share. In both Luxembourg and Dublin we are seeing a boost from growing institutional investor interest in alternative asset classes, especially real estate, but also private equity and alternative hedge fund strategies.
Alternative investments continue to attract institutional investors. The continuing low rate environment and ongoing depressed yields in traditional asset classes are significant challenges for investors, who, as a result, are increasingly looking at alternatives to achieve the returns they need to meet their liabilities. A report published by Mckinsey & Co in 2014 estimated that three-quarters of investors expect to maintain or increase their investments in alternatives over the next three years.
This trend has been supported by an increase in new or revised vehicles and structures, such as the Investment Limited Partnership in Ireland and the Special Limited Partnership in Luxembourg.
Parker: Over the last three years or so we have seen a significant emergence of the automation of private equity fund structures. First, retail and mutual funds were automated, then hedge funds and now private equity funds.
One reason for this is the growth of private equity as an asset class, meaning that there are just that many more of these fund types around.
Private equity asset managers have seen how successful automation has been with retail and hedge funds, and sensibly questioned if this could also be true for the types of funds that they manage. These types of fund structures are now better understood by administrators, for example, which fuels growth in the usage of technology in managing and administering these fund types.
How do administration requirements differ for real estate and alternative investment funds?
Danloy: Alternative funds, including real estate funds, have more complex underlying assets, which lead to different valuation frequency and accounting entries, and different demands fon transaction documentation and support to traditional UCITS funds.
Alternative funds often have more complex multi-jurisdictional structures that need support, and with them transaction and cash-flow monitoring requirements.
The domiciles of Luxembourg and Ireland are both home to exceptionally strong regulatory and service provider infrastructures which are well-suited to the greater complexity of handling real estate and other alternative investment funds.
What trends do you anticipate appearing throughout the rest of 2015, and beyond?
Parker: We believe much of the same, in terms of what has transpired over the last few years; more regulatory scrutiny and a continued demand for the automation of processes within the funds industry.
Danloy: Investor protection, and alongside that, increased scrutiny and regulation of the asset management and custody sectors, will remain key themes for the foreseeable future. There will be greater demands on fund administration in terms of reporting and transparency for valuation and pricing. Transparency in general is a growing trend, notably concerning taxation, and this is supported by regulatory initiatives.
Another trend is likely to be technology and how it will continue to influence the shape of the industry, from identifying and tackling new distribution models and how they are supported, to how the industry can learn from other sectors in areas such as cyber-security and effectively exploiting ‘big data’. AST
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