How asset servicers can mitigate resilience risk
11 June 2014
Given that mitigating resilience risk is likely to become FCA policy in the near future, the ability to replicate data is an issue that all asset servicers must consider as a matter of urgency, says Paul Sinclair of Exact Consultancy Services
Image: Shutterstock
In November 2013, the Financial Conduct Authority (FCA) published Report TR13/10, its thematic review of outsourcing in the asset management industry. The report focuses on assessing two key areas of risk relating to outsourcing of critical activities that could result in poor outcomes for customers if not mitigated effectively. These are:
Asset managers having inadequate contingency plans in place to deal with a failure of their service provider (resilience risk); and
Asset managers applying inadequate oversight of their service provider (oversight risk).
‘Too big to fail’ not a legitimate guarantee
The FCA’s position is clear—responsibility lies with the asset manager. If ‘too big to fail’ is not considered a legitimate guarantee of asset servicers by the FCA, an important element of resilience risk mitigation is the ability of their asset manager clients to either effect an ‘immediate insource’ of their data or have the ability to transfer that data across to another asset servicer.
Asset managers must therefore have a failsafe systems capability that can replicate the data that the asset servicer has, so that if the asset servicer should fail, it can instantly deploy and process from this constantly updated, alternative data source. This capability is sometimes referred to as ‘live archiving’.
It is open to interpretation as to whether this part of the recent thematic review refers to a different third party, or a separate entity that is still under the auspices of the same asset servicer. If the latter, fears will surely persist about the separate entity’s stability. If the former, there will inevitably be concerns about capacity.
Questions over capacity
Indeed, many asset servicers have cut back their capacity during the downturn and still face resourcing challenges. Many in the industry would argue that more asset managers would consider outsourcing but have concerns that the asset servicers lack the required bandwidth. With only a handful of dominant global players in the asset servicing market, could an asset manager rely on the alternate asset servicer being in a position to take on their business if the primary asset servicer failed?
Rather than asset servicers seeking agreements with their competitors, is there a better way of reassuring their clients and satisfying the FCA? One where, in addition to helping mitigate the resilience risk, there could be wider benefit to the industry through enabling asset managers to move between service providers more readily.
The burden of migrating all of an asset manager’s data from one outsource provider to another would be immense and could probably be only achieved in an unacceptable timescale. It would be far easier if that data were replicated at a third party supplier, which would have the ability and the tools to migrate data to a new outsourcer. In this way the old outsourcer could continue to operate in business as usual mode while the migration took place and the new provider merely needs to accept the data.
Benefits beyond compliance
Even if asset servicers do not as yet have to provide this service, it would certainly help reassure the regulator (and asset management clients) that the asset servicer is taking effective steps to mitigate its clients’ resilience risk.
Additionally, the side benefits of a live archive can be dramatic in terms of providing the client with immediate access to its data. The uses of that data could be anything from supplementary MI to data mining to bespoke client reporting—in short, anything that is difficult for asset managers to undertake when they are trying to extract data from the asset servicer.
From the FCA’s perspective, a key advantage would emerge if a firm outside of the asset servicer’s business were running the live archive. If an asset servicer were to build its own live archive (even through a separate entity), it would still be inextricably linked to the good fortunes of the parent firm. An independent archive system would also be far less expensive and faster to build than for an asset servicer to do so.
Live archiving is perhaps the logical first step for asset servicers in helping their clients satisfy the FCA’s concerns over resilience risk. It is a ‘quick win’—providing reassurance to asset managers that its outsourcer is taking the FCA’s anxieties seriously and making a first step toward producing a full resilience risk programme.
Offering this extra ‘safety net’ to clients would help attract more business to asset servicers.
If an asset manager had a live archive arrangement in place and perhaps only signed agreements with a secondary outsourcer in the event that the primary one should fail, this would go a long way to mitigating resilience risk.
Asset managers having inadequate contingency plans in place to deal with a failure of their service provider (resilience risk); and
Asset managers applying inadequate oversight of their service provider (oversight risk).
‘Too big to fail’ not a legitimate guarantee
The FCA’s position is clear—responsibility lies with the asset manager. If ‘too big to fail’ is not considered a legitimate guarantee of asset servicers by the FCA, an important element of resilience risk mitigation is the ability of their asset manager clients to either effect an ‘immediate insource’ of their data or have the ability to transfer that data across to another asset servicer.
Asset managers must therefore have a failsafe systems capability that can replicate the data that the asset servicer has, so that if the asset servicer should fail, it can instantly deploy and process from this constantly updated, alternative data source. This capability is sometimes referred to as ‘live archiving’.
It is open to interpretation as to whether this part of the recent thematic review refers to a different third party, or a separate entity that is still under the auspices of the same asset servicer. If the latter, fears will surely persist about the separate entity’s stability. If the former, there will inevitably be concerns about capacity.
Questions over capacity
Indeed, many asset servicers have cut back their capacity during the downturn and still face resourcing challenges. Many in the industry would argue that more asset managers would consider outsourcing but have concerns that the asset servicers lack the required bandwidth. With only a handful of dominant global players in the asset servicing market, could an asset manager rely on the alternate asset servicer being in a position to take on their business if the primary asset servicer failed?
Rather than asset servicers seeking agreements with their competitors, is there a better way of reassuring their clients and satisfying the FCA? One where, in addition to helping mitigate the resilience risk, there could be wider benefit to the industry through enabling asset managers to move between service providers more readily.
The burden of migrating all of an asset manager’s data from one outsource provider to another would be immense and could probably be only achieved in an unacceptable timescale. It would be far easier if that data were replicated at a third party supplier, which would have the ability and the tools to migrate data to a new outsourcer. In this way the old outsourcer could continue to operate in business as usual mode while the migration took place and the new provider merely needs to accept the data.
Benefits beyond compliance
Even if asset servicers do not as yet have to provide this service, it would certainly help reassure the regulator (and asset management clients) that the asset servicer is taking effective steps to mitigate its clients’ resilience risk.
Additionally, the side benefits of a live archive can be dramatic in terms of providing the client with immediate access to its data. The uses of that data could be anything from supplementary MI to data mining to bespoke client reporting—in short, anything that is difficult for asset managers to undertake when they are trying to extract data from the asset servicer.
From the FCA’s perspective, a key advantage would emerge if a firm outside of the asset servicer’s business were running the live archive. If an asset servicer were to build its own live archive (even through a separate entity), it would still be inextricably linked to the good fortunes of the parent firm. An independent archive system would also be far less expensive and faster to build than for an asset servicer to do so.
Live archiving is perhaps the logical first step for asset servicers in helping their clients satisfy the FCA’s concerns over resilience risk. It is a ‘quick win’—providing reassurance to asset managers that its outsourcer is taking the FCA’s anxieties seriously and making a first step toward producing a full resilience risk programme.
Offering this extra ‘safety net’ to clients would help attract more business to asset servicers.
If an asset manager had a live archive arrangement in place and perhaps only signed agreements with a secondary outsourcer in the event that the primary one should fail, this would go a long way to mitigating resilience risk.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
