Fund Managers Want to Correct Errors of Ways
November 18, 2011
Fund managers are always looking for solid returns and growth in assets under management.
But they also want to reduce their operational risk, according CityIQ, the London-based financial services consultancy. Simply put, they want to reduce manual errors.
“Manual processing of corporate action events is a top cause of mistakes,” said Dave Kubersky, managing director of SimCorp North America, an investment management technology firm. “Fund managers still send their custodian banks, emails and faxes of their decisions, which must be interpreted, transcribed and input into electronic systems.”
In the best case, errors add unnecessary expense, in every day operations. Worst case, a significant error in the middle or back office could result in millions of dollars being doled out to compensate investors or counterparties. In some cases, media headlines and regulatory fines ensue.
Eliminating this paper morass is rising to the top of the stack of fund manager concerns, according to a survey of 38 asset managers by CityIQ.
The CityIQ survey doesn’t provide any answers on how fund managers can reduce operational risk but provides some insight into which areas those managers are most concerned about. The top categories: corporate actions and over-the-counter derivative transactions. Seventy percent of fund managers said they were either very or moderately concerned about how they were managing those business lines. Reducing errors increases efficiency—and reduces the amount of staff needed to administer fund operations.
One potential solution now embraced by fund managers and custodian banks: Use electronic messages to communicate information and decisions on corporate actions such as income and dividend payments as well as reorganizations. Those messages endorsed by the International Organization for Standardization can travel through the global network operated by the Society for Worldwide Interbank Financial Telecommunications in La Hulpe, Belgium.
Also causing glitches: Bad or inconsistent data on the details of the corporate action and failures to properly record a decision made by a portfolio manager into internal accounting systems.
The portfolio manager might assign the wrong corporate action to the wrong underlying account or input information incorrectly. When that happens, share positions can be incorrect and so can the net asset value of the portfolio. Software providers, such as Simcorp, have platforms which can ensure that the same information is distributed—and viewed concurrently—by front, middle and back offices.
In the case of the burgeoning $700 trillion swap market, the pending regulatory requirement for processing many trades through centralized clearinghouses is proving worrisome.
“While some of the industry’s focus has been on the merits—or pitfalls—of electronic trading platforms, there is even more attention being spent on the impact on central clearing for middle and back office operations,” said Geoff Harries, global head of asset servicing for DST Global Solutions, an investment management technology unit of DST Systems in Kansas City, Mo.
Among the key concerns, Harries said, is just how fund managers will link to more than one clearing agent and keep track of their initial and variation collateral requirements.
In fact, the CityIQ survey discovered that fund managers want custodian banks to help them “facilitate” the route to clearing and netting. Such facilitation means providing them with portals which would connect them to clearing agents—broker-dealers who are members of central clearinghouses.
