# journal Volume 3 · No. 1 · April 2011 of Applied IT and Investment Management Rising to the regulatory challenge e investment management industry prepares for new legislation Industry experts assess regulatory changes THE CHALLENGE OF RECONCILING GROWTH AND COMPLIANCE Dodd-Frank Act HOW WILL THE ACT AFFECT IT SYSTEMS? IFRS 9 CHALLENGER MEETS REQUIREMENTS AND BUILDS COMPETITIVE ADVANTAGE WITH INVESTMENT MANAGEMENT IT UCITS IV WHAT INVESTMENT MANAGEMENT FIRMS SHOULD DO TO COMPLY AND ENSURE GROWTH Also ... SOLVENCY II, AIFMD AND SYSTEM BEST PRACTICES FOR COMPLIANCE: INSIGHTS FROM ERNST & YOUNG, TOWERGROUP, KPMG AND ALFI
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Journal of Applied IT and Investment Management Vol 3. No. 1
Journal of Applied IT and Investment Management is a financial industry periodical, published and distributed globally by SimCorp A/S. The aim of the journal is to contribute to a better understanding of the strategic and tactical trends in the global investment management industry.
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#journalVolume 3 · No. 1 · April 2011of Applied IT and Investment Management
Rising to the regulatory challengeThe investment management industry prepares for new legislation
Industry experts assess regulatory changesTHE CHALLENGE OF RECONCILING GROWTH AND COMPLIANCE Dodd-Frank ActHOW WILL THE ACT AFFECT IT SYSTEMS? IFRS 9CHALLENGER MEETS REQUIREMENTS AND BUILDS COMPETITIVE ADVANTAGE WITH INVESTMENT MANAGEMENT IT UCITS IVWHAT INVESTMENT MANAGEMENT FIRMS SHOULD DO TO COMPLY AND ENSURE GROWTH Also ...SOLVENCY II, AIFMD AND SYSTEM BEST PRACTICES FOR COMPLIANCE: INSIGHTS FROM ERNST & YOUNG, TOWERGROUP, KPMG AND ALFI
Journal of Applied IT and Investment Management is a financial industry periodical, published and distributed globally by SimCorp A/S. Print run: 19,000.
submissionguidelinesArticles, book reviews, new reports and information on recent research can be submitted for review to Co-Editor Mette Trier, [email protected]. For submission guidelines, please visit www.simcorp.com/journal.
SUBSCRIPTIONSubscription to the Journal is free of charge for members of the industry, associated institutions and academics. To subscribe, please visit www.simcorp.com/journal. Change of address should be e-mailed to [email protected].
by CEO Peter L. Ravn
meeting the challengeof reconciling regu-latory compliance with business growth intheinvestmentmanagementindustrytodaydoes not necessarily have to be a choicebetweenarockandahardplace.however,itisclearfromtherangeofarticlesappearinginthisissueoftheJournalthatcurrentandproposedregulation is irrevocablychangingthewaybusiness isdone in the investmentmanagementindustry.
Withimpositionofnewandupdatedlawsandstandards, suchasAifmd,solvency ii anduCiTsivproceedingineurope,thedodd-
frankActintheusAandifrs9internationally,itislittlewonderthatmanyofourclientsviewincreasedregulationastheprimarybarriertogrowthgoingforward.Theserequirementsarenotnegotiable.Theyaremandatoryandaprerequisitefordoing business. important for investment managers is to be able to fulfil theserequirementsandregardthemnotasaburdenimposedontheindustrybutrathertaketheoppositeview.Thisisnowtheframeworkwehavetooperateinandwehavetoseehowwecanbestturnthatframeworkintoacompetitiveadvantage.
Weareinthesituationwhereallkeystakeholdersincludinginvestorsandclientsdemand greater transparency and strong compliance with the necessary iTinfrastructure to back these up. We at simCorp acknowledge that a strongcompliancefunctionwillalsobecomeafactorofincreasingcompetitiveimportance,whichwilldefineandsetanorganisationapartfromitscompetition.
AndsimCorpdimension,withoneintegratedplatformandonedatabase,ensuresthatallclientshavethenecessaryconsistencyintheirdataandintheiroperationsasafoundationforalltheregulatoryreporting.Tohelpclientsrisetotheregulatorychallenge,our constantmonitoringof the regulatory scenemeans thatsimCorpdimension remains compliantandavoidsadiversionof resources fromrealisinggrowthstrategies.
in an ideal world, the investment management system is there to support thebusinessandtohelpthebusinesstoexpand,ratherthanbeingabarriertofuturegrowth.ifthesoftwareplatformismisconceived,wherethefundamentalsarenotinplace,theneventuallyitwillbecomeahindrancetogrowthratherthananimpetustohelpgrowthebusiness.Theregulatorychangesthatarecomingoverthenexttothree years not only place demands on the investment management industry intermsoftheend-userslikefundmanagementcompaniesandclientsbutalsoontheinvestmentmanagementsoftwaresolutionproviders.Theyalsoneedtostayontrackand keep up to date to avoid becoming a hurdle but rather support in securingcompetitiveadvantage.
it is our job at simCorp to remain vigilant and responsive, making sure thatsimCorpdimensionenablesourclients’investmentmanagementsystemstostayuptodateandallowsthemtoconcentrateontheircorecompetency–deliveringvalueforinvestors.
Peter L. Ravn, Ph.D., is CEO at SimCorp. Read the journal online at www.simcorp.com/journal
The investment management industry will have to adopt a host of regulatory leg-islation and new laws in the next few years. While working to meet client needs and growth goals, the industry must also address the impact that these regulatory changes will have on business, operational and compliance requirements. This ar-ticle presents some views on the challenges and solutions with regard to aligning compliance and growth strategies.
Acrosstheglobe,asweepingwaveofregulatoryreformandchange is redrawingthecontoursofthefinan-
for the investmentmanagement in-dustry,by and large, the regulatoryandcompliancechallengesintheyearsaheadwillbeunprecedented.Amongthemanifoldchangestobetakenintoaccountat thestrategic, tactical, sys-temicandoperationallevelsarethenew
TherighTChoiCesWithunparalleledregulatoryactivityandmorestringentclientdemandsoninvestmentmanagers,achievinggrowthwill entail thatcompaniesmake theright investmentmanagementsystemchoices in thecurrentenvironment.sriramvenkataraman,anexecutiveinernst&Young’sfinancialservicesriskmanagementpracticeinnewYork,takestheview:“regardlessofwhether
Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management.
# Regulatory change: the challenge of reconciling
growth and compliance
“The combined ramifications of legislative and regulatory reform include the advice investment managers offer clients, the way they handle transactions, how they market the business, the
disclosures they provide, and ultimately the manner in which they will have to reconfigure and retool existing operational and
IT platforms.”Michael T. Dolan, Partner at Ernst & Young in Washington D.C.
inadditiontoahostofothermeasures,thedodd-frankActsignificantlyen-hancesthepowersandcapabilityofthesecuritiesandexchangeCommission(seC),CommodityfuturesTradingCommission(CfTC),andthefederalreserveandcreatesanewagencycalledtheConsumerfinancialprotectionbureau(Cfpb).notesmr.shahrawat:“dodd-frankclarif ies the roles andresponsibilitiesofregulators,whichisofspecialsignificanceinareassuchas
Theinternationalfinancialreport-ingstandard9(ifrs9)isthelatestrevisionofinternationalaccountingstandardsissuedbytheinternationalAccountingstandardsboard.Thestandardsareintroducedtoimprovetransparencyof theprocesses inwhichvariousfinancialassetsandliabilities are valued, accountedforandreported,andspecificallydealswithnewrequirements fortheclassificationandmeasurementoffinancialassets.ifrs9replacesiAs39andconsistsofthreephases,ofwhich the last twoare still inprogress.firmshaveuntil2013tocomplywithifrs9.(foracorpo-ratecasestudyonifrs9,seearticleonpage12.)
neWeuropeAnrulesineurope,therangeofnewregulationswillprimarilyaffect investmentfunds–mutualandalternativealike–andsig-nificantlychangethewayinwhichtheyareoperated,marketedanddistributed.Thevarious industry linksmakingup
“Of these five key areas of legislation, the Dodd-Frank Act is probably the most comprehensive and all- encompassing in terms of the impact it will have on financial services in general and the investment management industry in particular.”
Thedodd-frankActisdesignedtopromoteusfinancialstabilitybyimprovingaccountabilityandtrans-parency in the f inancial system.itestablishes rigorous standardsandsupervisionstoprotecttheuseconomyandconsumers,investorsandbusinesses.Theactimpactstheentireusinvestmentmanagementindustryinvaryingdegrees,aswellas foreign investmentmanagerswith signif icantholdings inusf inancial assets.roll-outof thedodd-frankActstartedJuly2010andwillcontinueoverthenexttwo-threeyears. (foramoredetailedstudyofthedodd-frankActanditseffects,seearticleonpage20.)
TheuCiTsivdirective isare-formofpreviousuCiTsdirectivesdesignedtocontinuetomaketheinvestmentfundmarketintheeulessfragmentedandtoimproveitsefficiency.uCiTsivaimstomakefundconsolidationeasier, improvedistributionandcross-bordermar-keting.uCiTsivimpactstheeuinvestment fund industryaswellas foreignfundmanagers issuinguCiTs funds in theeu,wherefundmanagershaveuntilmid-2011tocomplywiththeprovisions.(forareportonuCiTsivanditspracti-calimpact,seearticleonpage16.)
havingbeenapprovedbytheeuropeanparliament,CouncilandCommission,Aifmdwillgoaheadinitspresentforminmid-2011.during2011Aifmdwillproceedthroughlevel2negotiationswhere substance isadded to thepro-posalsasagreed.Theeu’s27memberstatesthenhavetwoyearstotransposeAifmdintonationallaw,withAifmdprojectedtoenterintoforceinmid-2013.
Alsoaffectedby thisdirectiveonanationallevelisswitzerland,insofarasaeuropeanfundmanagermaybehead-quarteredinswitzerland,justasafundmanagerheadquarteredinswitzerlandmayofferbothswissandeuropeanfunds for sale in theeu.Commentsdr.matthäusdenotter,CeooftheswissfundsAssociation(sfA):“fromtheswissperspective, it iscrucialthateuropean fundmanagersareable todelegatecertainbusinessactivities toswiss f inancial servicesprovidersontheonehand,andthatswissfundsandfundmanagersreceivetherelevant‘eupassport’ontheother.”
ifrs9doubTsifrs9maybeseenastheaccountingworld’sanswer to the f inancial crisis,buttherearedoubtsthatthestandardisenoughtopreventanothercrisis.manyexpertsarguethatthisrequiresvigilancefromallstakeholders–fromaccountantstoinvestorsandregulators.All inall, itpoints to improvedfiscal transparencyandconvergence.
mentmanagement industryat large.inthewordsofmr.dolan: “investmentmanagementfirmshavedealtwithchang-ingregulations,accountingpoliciesandrisk trends.but this time it’sdifferent.Complyingwith emerging ruleswillrequirefundamentalchangesinbusinessmodelsandstrategies.Theimpactwillbeenterprise-wide.Werecommendthatfirmsleverage their compliance investmentsintoagrowthagendabystreamliningandenhancingsystemsportfolios, improvingdatagovernanceandmanagement,andenhancingcustomermanagement.”
Asaconsequence,andinviewofthisall-encompassingandwide-rangingchange,regulators expect to see, and indeeddemand,acomprehensive,custom-builtandsophisticatedcomplianceprogrammewithfull testing,useof technologicaltoolsandiTexpertise.Theconsequencesofnon-compliancearenotworththink-ingabout,andacompliancefailurecanproveterminaltoabusinessoperation.
Michael Metcalfe is Co-Editor of the Jour-nal of Applied IT and Investment Man-agement. A financial journalist by profes-sion, he has worked for such publications as The Economist, Financial Times and In-ternational Herald Tribune. Based in Germany, he also worked in the Luxem-bourg financial sector for 10 years, includ-ing tenures with Nordea Investment Funds S.A. and Lombard International Assurance S.A.
“… regulators expect to see, and indeed demand, a comprehensive,
custom-built and sophisticated compliance programme with full testing, use of technological tools
and IT expertise.”
Dodd-Frank Act, UCITS IV, IFRS 9, Solvency II and AIFMD: legislation sweeps the industry with new requirements. The right investment management system can help you meet the challenges.
To determine your system challenges, take our self-assessment and receive a personalised impact quick guide that outlines:
• which regulations will affect you • what impact these regulations will have on your investment management system• which areas of your software platform you should focus on• what actions to consider regarding each regulation.
Assess regulatory impact today at
http://compliance.simcorp.com
compliance.simcorp.com
Assess the impact of new regulations on your investment management system
New financial legislation being passed across the globe will have sweeping repercus-sions on the technical and IT structures of investment management organisations. Based on interviews with three global consultancies, Michael Metcalfe, Co-Editor of the Journal of Applied IT and Investment Management, discusses the choice of IT platform when it comes to gearing up to meet the regulatory challenge in a post-crisis environment.
in thecaseofeurope, theprincipaleu-wideregulatorymeasures includethenewuCiTsivdirective;mifidconductofbusiness, including rulesregardingpointofsaleordistributionoffinancialproductsandthewayinwhich
# Best practices: the optimal investment management system for regulatory compliance
Michael T. Dolan is a Partner, Ernst & Young LLP, Washington D.C., USA.
Sriram Venkataraman is an Executive, Financial Services Office, Ernst & Young LLP, New York, USA.
Dushyant Shahrawat is Senior Research Director, Securities and Investments, TowerGroup, Boston, USA.
“… many players are re-assessing their existing business models, technical operations and the relationships that support these processes, at the same time as seeking to improve risk management oversight and control.”
understandingtheintricaciesandnu-ancesofuCiTsivwillbeimportantaswell to ensure theorganisation’stechnologyandoperationalprocessesarealignedsuccessfully.Whilefundmanag-ersconcentrateontheircorecompetencyofmanagingmoney,outsourcingopera-tionalsolutionsoffersonewaytomeetchallengesonthemanager’sownterms.europeanassetmanagersshouldtakethetimenowtobetterunderstanduCiTsiv’sarrayofoperationalchallengestodeterminewhichcanbemetbyinternalversusexternalresources.
mAJorusreformissuesTurning to theusA, six issueswillbecomemajorbusinessprioritiesowingtoregulatoryreform.Theseareinturn:
Risk management Thelargestopportunitythatthenewregulatoryenvironmentcreateswillbeinhelpinginvestmentorganisationsretooltheirriskmanagementdepart-ments.Anintensefocusonriskwillbedrivenbypressurefromshareholderstobettermanagecompany-widerisk,whether arising from the expectedrequirementsofbaseliiitothemanyprovisionsof thedodd-frankActthatrelatetoriskmanagementandthedemandsplacedbythenewofficeoffinancialresearch(ofr).
“To rise to the challenge of UCITS IV, investment managers will have to build into their IT best practices the necessary technical and operational functionalities …”
Leverage and capital adequacy Acommonandunifyingthemerunningacrossseveralregulatoryrequirementsisstricterlimitsontheamountofleveragethatinvestmentmanagementoperationscanassume,greatercapitalrequiredtobeheldonthebooksandfrequentandmore
comprehensivereportingofleverageandcapitalheld.
Tomeetthesedemands,institutionswillneedtoundertakeathree-stepprocess.Theywillneed tomonitor securitiespositionsmoreandmoreinrealtime,aggregatetheirexposureacrossalllinesofbusinessandbeable toreportandmanage it in linewith requirementsembodiedintheCollinsAmendment.investmentmanagementorganisationswillrequiresupportforallthesetasksforoneofseveralreasons:inmostcases,they
simplydonothavethein-houseskillstodothiswork, they lacktheskilledpersonneltodoit,orexternalsupplierscandoitmorecost-effectively.
groWThChAllengesAs regulatory requirements and cli-entdemanddrivechange, investmentmanagementorganisationswillneedtore-appraise their investmentmanage-mentsoftwaresystemsinordertoadoptbestpractice.Amongthemostimportantpointsforconsiderationincludethewaydataisstored.ifdataisstoredinseveraldatabasesorsystems, includingspread-sheets, itbecomesdifficult toobtainatrueindicationofriskexposure,aswellastogaininsight intoliquidity,valuationsandsimilarmetrics.valuable timeandresourcesarespentontryingtoconsolidatedisparatedatasourcesintoacleanandtruepictureofthebusiness.
inaddition,companieswillfindthatdueto limitations intheir investmentmanagementsystemplatforms,thereisanabundanceofmanualprocessesandduplicatedataentries,whichconsumeresources and result inhigher errorrates.further,manymonths–orevenyears–maylapsebetweennewreleasesorupgradestotheplatform;whichforcesdiversionofiTandotherresourcesto
“A common and unifying theme running across several regulatory requirements is stricter limits on the amount of leverage that management operations can assume, greater capital required to be held on the books and frequent and more comprehensive reporting of leverage and capital held.”
# Best practices: the optimal investment management system for regulatory compliance
Thecompanythenfinds itself in thesituationofswimmingagainstthecur-rentjusttokeepupwiththetideofnewregulation,ratherthandedicatingtimetogrowing thebusiness.finallyandperhapsmostimportantly,theplatformdoesnotsupportallassetclassesandfinancial instruments,therebylimitingtheopportunitiestogrowthroughex-pandinginvestmentofferings.
sYsTemsoluTionsAnoptimaliTplatformembeddedinthetechnologyprocessesof the indi-vidualinvestmentmanagementorgani-sationaddressesalloftheabovepointsbyprovidingacoresystembasedonasingledatasource,combinedwithashighadegreeofautomationasispossible.Thesystemshouldbefrequentlyupdatedandprovidecoverageofallassetclassesandfinancialinstruments.
Michael T. Dolan is a Partner at Ernst & Young LLP and is based in Washington DC. He is part of the organisation’s Advi-sory practice where he helps clients improve the overall performance of their operations, accounting and financial reporting processes. Michael Dolan specialises in implementing new portfolio accounting and analytical re-porting systems for portfolios of investments, debt, and derivative products. He holds a Masters degree in Quantitative Finance and is a Certified Public Accountant (CPA).
Sriram Venkataraman is an Executive in the Financial Services Office of Ernst & Young LLP and is based in New York, USA. He is part of the organisation’s Advisory practice and has experience in market risk management, financial derivative pricing models and trading system implementation. Sriram Venkataraman’s client base covers major money centre banks and financial institutions.
Dushyant Shahrawat is a Senior Research Director at TowerGroup in the Securities and Investments practice, Boston, USA. With over 15 years of experience in finan-cial services, he is a Chartered Financial Analyst (CFA) and a member of the Boston Security Analysts Society. Dushyant Shah-rawat researches strategic issues facing asset managers, hedge funds and brokerage firms globally, and advises clients about strategy, marketing, regulation, technology and prod-uct development. He has shared his opinions on financial industry trends at over 100 events across the USA, Europe and Asia and has appeared on various television and radio channels. He has also been widely quoted in printed publications such as the Wall Street Journal, New York Times, Fortune, and the Financial Times.
TOWERGROUP
Towergroup is a leading re-search and advisory servicescompany focused exclusively onthe global financial services in-dustry.formorethanadecade,ithas provided the world’s top fi-nancialservices,technology,andprofessional services companieswithadviceandinformation.itsteamof analysts and specialisedadvisers covers the business andtechnological issues impactingthe entire financial servicessector. more information atwww.towergroup.com.
ERNST & YOUNG
nearly 35,000 ernst & Youngfinancial services professionalsaround the world provide inte-gratedassurance,tax,transactionand advisory services to assetmanagement, banking, capitalmarketsandinsuranceclients.intheAmericas,ernst&Youngisthe only public accounting or-ganisation with a separate busi-nessunitdedicatedtothefinan-cialservicesmarketplace.Createdin2000,theAmericasfinancialservices office today includesmorethan4,000professionalsatmember firms in over 50 loca-tions throughout the usA, theCaribbean and latin America.practitioners span many disci-plines and provide a well-rounded understanding of busi-ness issues and challenges, aswell as integrated services. formoreinformation,visit www.ey.com/us.
“As regulatory requirements and client demand drive change, investment management organisations will need to re-appraise their investment management software systems in order to adopt best practice.”
AdifferenTsTorYinChallenger’scase,thestoryisalittledifferent.likeeveryoneelse,Challengerhastoconsidertheimpactofifrs9,butforotherbusinessreasonshadalreadymovedon to the stageofneeding toaccountonbothanamortisedcostandfairvaluebasis longbefore theifrschangeswere introduced.using therightassetsoftwaresolutionintheformofsimCorpdimensionwasakeyfactor
Challengeralsooperatesafundsman-agementbusiness of approximatelyA$20billion(seefigure1),applyingamulti-boutiquestrategywith10boutiquepartnerswithintheorganisationservic-
Investment management companies worldwide have to consider the impact of the new IFRS 9 accounting standard on their financial reporting and accounting procedures. This article describes how one Australian company is prepared to meet the IFRS 9 challenge head-on with the support of its financial software solution.
# IFRS 9: meet requirements and build competitive advantage with investment management IT
David Mackaway is General Manager, Operations, Challenger, Sydney, Australia.
“IFRS 9 aims to achieve just that – make the accounting of financial instruments simpler,
cost if thefund’sbusinessmodel is toholddebttomaturityandthepaymentsreceivedare solely forprincipal andinterest.debtnotatamortisedcostandallequityandderivativeswouldbeatfairvalue.
Thecostsoffinancialinstrumentsatfairvaluethroughprofitorlosswillhavetobesegregatedfromtransactionorcom-missioncosts,whichwillbeexpensed.managementandtheadministratorwillwanttotrackactivityoveraperiodoftimeusingifrsindicatorsandpreparesamplefinancialstatementstobeassuredthat ifrsreporting is accurateandcomprehensive.
Fig. 1. Australian industry FUM growth projections (A$ billions).Source: Rainmaker Roundup,December 2009.
“We use the system in a holistic way for investment administration ... With it all carried out within the one system, we gain a lot of operational efficiency and strong management control over our entire book of assets.”
Aninstrumentismeasuredatamortisedcostonlyiftheentity’sobjectiveistoholdtheassettocollectcashflowsandifthecontractualcashflowsaresolelypaymentsofprincipalandinterest.Assetsthatfailtomeet the twocriteria (forexample,equities,convertiblebonds,forwardsorswapcontracts)shouldbemeasuredatfairvaluethroughprofitorloss.
AstheregulatoroverseeingChallenger’sannuitybusiness,AprArequires theassets and liabilitiesheld in the lifecompany tobevaluedonamark-to-marketbasisandthisformsthestatutoryreportingforthebusiness.inaddition,Challengerformanagementreportingpurposeslooksatcashoperatingearningsonanamortisedcostbasistoshowthelevelofcashflowbeinggeneratedtosup-portthepaymentsmadetoitsannuitants.
in relation toChallenger’smanagedfunds’business,therehasalwaysbeenarequirementtovaluetheseportfoliosonafairvaluebasis.it’sfundamentaltothebusiness:manyofthefundsoperatewiththeideaofbuyingandsellingsecuritiesonanongoingbasistogenerateperform-anceandthereisaconstantneedtohaveassetsvaluedattheircurrentfairvaluetoensureequitabletreatmentofallunit-holdersandtodealwiththeebbandflowofinvestorsapplyingforandredeemingintothefunds.
CAshfloWsAsbuildingbloCKsoneofthefundamentalstrategicbuild-ingblocksthatChallengerbelieves itsinvestmentmanagementsolutionhasrightwastobuildasystemthatthinksabout securitiesbasedon their cashflows.securitiesinthesystemareliter-allymadeupofabundleofcashflows,andonceallthesecashflowsaregatheredandassembled,eachandeveryonecanthenbevaluedatvaryingrates.Thatisarealstrategicdifferencecomparedwithsomeoftheothersystemsthatareavail-ableinAustralia.
“ ...we were looking for a contender with a proven
ability to be highly flexible in accounting for and running
assets for different businesses within one system.”
# IFRS 9: meet requirements and build competitive advantage with investment management IT
Challengerconsidersitselfassomewhatofanindustryleaderinbeinginnovativeanddesigningproduct thatmeets theneedsofitsclients,andwealsoconsiderourselvesasbeingresponsiveinspeed-to-market.beinginnovative,dealingwithconstantchangeandbeingabletobringthat to themarketplaceveryquicklymeansthatyouneedalotofcontrol,notonlyintermsoftheinvestmentmanage-mentperspectivebutalsotheadminis-trationandoperationoftheproductaswell.Withthetypeofsoftwaresolutionwehave,itreallyincreasesourabilitytosupportalltheseneedsandisakeyreasonweretainthefunctionin-house.
CHALLENGER
Challengerlimited (Challenger)is an investment managementfirmestablishedin1985andlistedon the Australian securities ex-change(AsX:Cgf)in1987.Theforemostissuerofretailannuitiesin Australia, Challenger is theonly financial services companydedicated to providing guaran-teed, certain-return incomestream products to both institu-tional and retail clients. Today,Challenger life manages overA$7billioninassetstosecurein-come for approximately 60,000clients. in addition, Challengeroperatesa successful fundsman-agement business across variousassetclassesmanagingoverA$20billionandservicing55,000retailand 75 institutional clients. Thisis operated via a multi-boutiquestrategy whereby Challengerpartners with boutique invest-mentmanagementfirmsofferingbothadministrationanddistribu-tion capability. Currently thereare 10 boutiques in the Chal-lenger stable. more informationatwww.challenger.com.au.
“The ability to slice and dice a security and break its valuation down into cash flow components
clears the way to proceed along many different paths.”
David Mackaway has held the post of General Manager, Operations, at Chal-lenger since 2007 and is responsible for all investment and registry operations sup-porting the Challenger business. He has worked in the industry for over 17 years and prior to joining Challenger was an Executive Director of MMC Asset Man-agement Limited and Chief Financial Of-ficer of ASX-listed MMC Contrarian Limited. Prior to MMC, David was based in the USA as Global Head of Op-erations for Principal Global Investors. He also worked in Australia for BT Funds Management for over 10 years in various operational roles, including running BT’s fixed interest and currency business.
David Mackaway, Challenger’s General Manager, Operations, outlines how an optimal software solution can improve an investment management company’s ability to meet the needs of being innovative, adaptable to change and responsive in speed-to-market.
uCiTsiv is the latest reformof theuCiTsdirectives–aseriesofefficiencyandconsolidationmeasures(seefigure1)thatwillallowtheindustrytoaddresslackofscale,experiencecostsavingsandimprovetheefficiencyoftheireuropeanoperations.itwasapprovedbytheeuro-peanCommissioninJuly2010and,pend-ingeumemberstates’legislativeapproval,itwilltakeeffecton1July2011.
Thelargerindustryplayersbynowarewellpreparedinrespecttothemanda-torychanges (i.e. introductionof theKeyinvestorinformationdocument),whichwillalsobeinforcebyJulythisyear.however,theyareonlybeginningtoprepare for thenewconsolidationopportunities.
WindoWofopporTuniTYThedirective really does open thewindow for increased cross-borderoperations.butonce thewindow isopened,investmentmanagementfirmsfacebigchallengesinrespecttovarioustax-regimesupportandlocalregulatoryspecialities.Withoutahugeextraef-fort,the27differenttaxregimesofthe
one thing is togain theneeded taxknowledge,but justas important istomakesurethatplayershavetherightiTinvestmentmanagementplatformtoimplementthisknowledge.Toobtainthenecessaryeconomyofscale,thetrickistosellthesamefundtoasmanyinves-torsaspossible,butstill includetheirvariouspreferencesinrespecttospecialdistributionneeds, riskpreferences(hedgeclasses), large-or small-scaleinvestments(variousfeeconstructions),performancefeesandtaxsupport.
oneofthemainfeaturesofuCiTsivis themaster-feederstructure,whichprovidesforpoolingofassets.Thisnewfundopportunityaddsanadditionaldimension to the complex tools formodellingstructuresthatcantargetalargerinvestorgroup.fundmanagementcompanieshaveto invest timeand/ormoneygainingtheneededmultipletax-regimeandregulatoryknowledge.ThentheyhavetoensurethatthisknowledgecanbeimplementedinaniTinvestmentmanagementplatform,whereviaaflex-ibledefinitionanddesignoffundstruc-tures,pricingandfeestheycanputthesechangestogoodeffect.Withoutthisthebenefitsonoffercannotbeutilised.
With UCITS IV coming into force from 1 July this year, the main objective is to make the fund industry more efficient while still maintaining a high level of inves-tor protection. Windows of opportunity will be opened for those firms deploying the right investment management software solutions but disparate tax regimes tend to overshadow the benefits of the directive.
# UCItS IV: what investment management firms should do
to comply and ensure growth
Peter E. Hertel is Domain Manager for Fund Accounting, SimCorp.
“The directive foresees that the investment fund market will
be able to consolidate funds and reduce the number of
local management companies, resulting in cost savings
Kidisacompactdocumentcoveringseveral investmentmanagementplat-formdisciplines. itobliges the fundtohaverisk,performanceandchargesinformationintegratedinonedocumentand,asinmorefrequentfact-sheetre-porting,displaystheneedtohaveaniTinvestmentmanagementplatformthatcandothistypeofintegratedreportinginasmooth,well-reconciled,auditableandreliableway.ThiswillputstressoniTplatformswithmultiplesystemsanddifferentreleasecyclesandincurhigh
Thewaythingsstandatpresent,manyfundmanagementcompaniessimplydonothavealltheKidinformationhousedorstoredinonesystem(i.e.performance,risk,charges,explanatory texts,etc.).shouldtherequireddatabestored inadatawarehouseorshouldoneofthegivensystemsbeusedas thecentraldataholder for the information?Cananyofthesystemsavailablecontainthisinformation?And,ingeneral,howdoesacompanymakesurethattheinformationusedisinternallyconsistent?
– (Simpli�cation of the cross-border noti�cation procedure)
Mandatory changes
– Management company passport (MCP) – Cross-border UCITS mergers
– Master-feeder UCITS structures
New opportunities
Figure 1. Most important amendments introduced by UCITS IV.The new directive comprises five new basic elements: two new mandatory changes and three new opportunities.
“The way things stand at present, many fund management companies simply do not have all the KID information housed or stored in one system (i.e. performance, risk, charges, explanatory texts, etc.).”
Cross-borderuCiTsmergersThenew legal framework to facilitatecross-borderuCiTsmergerswillopenupforconsolidationacrossbordersandtherebyenhancetheeconomiesofscale.Withtheaveragefundsizeineuropeasmeasuredintermsofassetsundermanage-mentsixtimessmallercomparedtotheav-erageusfund,thisamendmentisseenbymanyasanimportantefficiencybooster.
mAsTer-feederuCiTssTruCTuresThenewoptionforcreatingmaster-feederstructuresunderuCiTsivhasprovedoneofthelargerdiscussionelementsofthedirective.Thebenefitsofhavingthisoptionareobvious,asitallowsthefundmanagementcompanytocentralisetheinvestmentplatforminonestateandstillhavelocalfundswithanationalflavour.oralternatively,insteadofestablishingnew local fundswith theirownassetmanagementfunctions, itcanenhancethedistributionchanneloflargermasterfundsbyestablishingsimplefeederfundsinvestingintothemaster.
constructionwitha link inrespect topricing transparency, timingandac-counting.Cesrlevel2requirements(‘box2’)statethatamasterandafeedermustdefinethetermsofagreementthefeedermusthaveto‘Accesstoinforma-tion’, therebyenabling the feeder toperformitsexposure,complianceandotherriskmanagementfunctions.
TheCesralsostatesthatthefeedersshouldreceiveperiodp/lfigures.forasimplefund-of-fundconstructiontheperiodp/lfiguresinthefund-of-fundwillbelimitedtothep/ldirectlyonthefundcertificate.butisthissufficientfortheinvestorsinthemasterfund?fortaxreasons, it is likelythatsomeinvestorswillrequestthatincomeisbrokendownintomoredetails(i.e.dividendincome,interestincomeorcapitalgain).
however,thequestionishowdetailedtheseshouldbe?Andhowcanthemasterfundmakesureto informthefeedersabout their shareof theperiodp/lwhentheownershipratioshaverecordedchangesoverthelastperiod?
WindoWAJAruCiTsivopensthewindowforeasieraccesstonewinvestorsandincludesaseriesof much-neededefficiencyandconsolidationmeasures.Therequiredinvestorreportingexposesthepowerofanintegratedinvestmentplatform.buttoreallybenefitfromtheopeningwindow,fundmanagementcompanieshavetoexaminetaxregimerequirementsandmake sure that the iTplatformcanaddress the increasinglycomplex
fundstructureswiththerequiredtaxtransparency.
uCiTsivhashighlightedtheimpor-tanceofhavinganintegratedinvestmentmanagementsoftwaresystemthat ina f lexiblewaycanhelpdesign fundstargetinglargeinvestorgroupsinacost-efficientway.
Peter E. Hertel is Domain Manager for Fund Accounting in SimCorp’s Strategic Research department. He holds an M.Sc. in Economics from Copenhagen Univer-sity. He joined SimCorp in 1988 and over the years has been involved in develop-ment, sales, support, project management, implementation and internal and external training. In the past five years he has been heavily involved in implementing fund ac-counting in Denmark, Finland and Lux-embourg, heading up the global fund accounting domain in SimCorp’s Strategic Research department. Here he has worked on enhancing global support for complex fund structures and multiple tax regimes with a focus on optimising daily work-flows, thereby helping to achieve growth with general risk control in a cost-efficient way.
Peter E. Hertel, SimCorp, urges fund management companies to ensure their IT platform can address the increasingly complex fund structures with the required tax transparency.
The law seeks to correct structuralweaknessesintheusfinancialindustryliketheriskposedbyactivitythatfallsoutsidedirect regulatory supervisioni.e.tradinginover-the-counter(oTC)derivatives, thesystemicriskposedbyverylargefinancialentitiesfailing,andthedangersofnotrequiringunderwritersandsecuritisationfirmstomaintainsomeexposuretotheassetstheysecuritise.
sweepingas itmaybe,manycrucialdetailsofthedodd-frankActremainunclear–thelegislationisstillaworkinprogressandsecuritiesfirmswillhavetoawaitdetailsoftheruleswithwhichtheymustcomply.Changesinareaslikederivativesandnewcapitalrequirementswillbephased ingradually, the firstphasebeingexpectedin12–16monthsandthesecondphaseoverthenexttwotothreeyears.
five implicationsofnewregulationontheindustry'stechnologyandoperations.
Key areas for considerationnot surprisingly, thepassageof thedodd-frankActandotherregulationswillmeangreater investmentmanage-ment systemrequirements incertainareas: riskmanagement, compliance,reporting,andanalytics.itisourbeliefthatiTspendingintheriskandcompli-ancebusinesswillgrow8–9%between2010and2011,ledbythelargestinsti-tutionalbrokeragefirms.hedgefundsmustinitiateiTprojectstocomplywithregistrationrequirementsandenhanceoverall transparencyanddisclosureofoperations(albeitquitehesitantly).Anddatamanagementwillalsonecessitategreatimprovementsinriskmanagement,compliance,reporting,andanalytics.
Renewed focus on cost savings and efficiencyAs regulation impacts the industry'seconomics,pressingdownrevenue(fromproprietary trading,oTCderivatives)andpushingupcosts(ofriskmanage-ment,compliance,reporting),pressureoncostsavingsandefficiencywillrevive.TherewillbeoverallcostpressureontheentireiTbudget,particularlyinareaslikeagencybrokerageandoTCderivatives.evenifeconomiesimprovedramaticallyin2011andbeyond,chieffinancialoffic-erswillcontinuetopressureheadsofiTandoperationstoseekwaystotrimcostsinresponsetocontinuedmarketuncer-taintyandreducedprofitability.
New US regulations as embodied in the Dodd-Frank Act will have a far-reaching and profound impact on the investment management industry, not only in the USA but elsewhere, affecting competitive positioning of firms, market structure, revenue growth, profitability, and IT budgets. The industry will have to overhaul five investment management system areas: risk management, compliance, reporting, analytics, and data management.
# Dodd-Frank Act: how will the act affect IT systems?
Dushyant Shahrawat is Senior Research Director, Securities and Investments, TowerGroup, Boston, USA.
“The Dodd-Frank Act and other regulation related to
securities and investments will collectively have a major
impact on the technology and operational decisions of
Greater pressure to outsourcenewregulationswillalsopushsomefirmstore-examinetheirattitudetowardoutsourcing.renewedcostpressuresandtheneedtobolstercapabilities incertain areasmay cause investmentmanagerstoseekmorerelationshipsinbothbusinessprocessoutsourcing(bpo)andinformationtechnologyoutsourcing(iTo).brokerswillalsofurtherexpandoutsourcingrelationships insecuritiesprocessing,causingthefewremainingfirmsthatself-clear toconsiderusingcorrespondentclearingproviders.
Changes in service deliveryregulatorypressurewillalsohaveanim-pactoninvestmentmanagementfirms'attitudetowardthewaytheyconsumesoftware,influencingtheirperceptionofconceptssuchasapplicationservicepro-vider(Asp)-baseddelivery,software-as-a-service(saas),andcloudcomputing.forthelastfivetosevenyears,therehasbeenacleartrendintheindustrytowardthin-clientcomputingandaccessingsoftwarethroughaweb-basedinterface.
Thenewregulationswillpushthistrendfurtherascompaniesgrapplewiththreedemands: theneed to reduce costs,enhanceflexibility,andreport inrealtime.Theneedtocutcostsandenhanceflexibilitywilldriveupdemandforcloudcomputing,withtheinitialfocusbeingonpushinggenericserviceslikestorageandcomputingpower into thecloudsoonfollowedbymorebusinessfunc-tionslikedatamanagement.
“Pressure will be greater on chief technology officers to cut costs, drive greater efficiency, better articulate return on investment on new projects, be more accountable to business users, and be more flexible in responding to business needs and regulatory requirements.”
EXCLUSIVE VIDEO INTERVIEWWatchourinterviewwithTowergroupseniorresearchdirector,dushyantshahrawat,tohearmoreabouthowthedodd-frankActandotherregulationswillaffecttheinvestmentmanagementindustry.
figure1illustratessix issuesthatwillbecomemajorpriorities for the insti-tutionalsecuritiesbusinessduetousregulatoryreformandpresentsexamplesofinvestmentmanagementsystemfocusareasdrivenbyregulatorychallenges.
poinTsToConsiderinresponsetothenewregulatorypow-ers,greater resources, anda strictermandategrantedtoregulatoryagenciesbythenewlaws,securitiesfirmswillneedtoenhancetheircompliancede-partments,addstafftodealwithmoreregulatoryexaminations,andimplementcompliancesoftware(forsurveillanceofemployees for insider trading,datasecurity,andprivacy).Thismeansthat
it isclear then that thedodd-frankActwillhaveaprofoundimpactonthetechnologydepartmentsof securitiesandinvestmentfirms,requiringthemtomakechangestoprocessing,account-ing,riskmanagement,andcompliancesoftwareapplications.lowerrevenueinareassuchasoTCderivativesandagencytradingwillputpressureoniTbudgets,butgreenshootswillemergeinareassuchasriskmanagement,report-ing,anddatamanagement.
Dushyant Shahrawat is a Senior Research Director at TowerGroup in the Securities and Investments practice, Boston, USA. With over 15 years of experience in finan-cial services, he is a Chartered Financial Analyst (CFA) and a member of the Boston Security Analysts Society. Dushyant Shah-rawat researches strategic issues facing asset managers, hedge funds and brokerage firms globally, and advises clients about strategy, marketing, regulation, technology and product development. He has shared his opinions on financial industry trends at over 100 events across the USA, Europe and Asia and has appeared on various tel-evision and radio channels. He has also been widely quoted in printed publications such as the Wall Street Journal, New York Times, Fortune, and the Financial Times.
TOWERGROUP
Towergroupisaleadingresearchand advisory services companyfocusedexclusivelyontheglobalfinancial services industry. formore than a decade, it has pro-vided the world's top financialservices, technology,andprofes-sional services companies withadviceandinformation.itsteamofanalystsandspecialisedadvis-erscoversthebusinessandtech-nological issues impacting theentire financial services sector.more information at www.tow-ergroup.com.
“It is clear then that the Dodd-Frank Act will have a profound impact on the technology
departments of securities and investment firms, requiring them to make changes
to processing, accounting, risk management, and compliance software applications.”
– Collateral management– Central clearing– Real-time reporting
fromtheoutset itwasclear that thedirectivewouldsubstantiallychangetherulesapplyingtomanagersofalternativeinvestmentfundsintheeudomain.butmuchof thehardwork–thelevel2implementationphase–stillliesahead.
ThewayinwhichAifmdcameintobe-ingwasnotaprocedurethatisnormallyused,however.normallyaconsultationphase isgonethrough, resulting inadraftdirective.heretheeuCommis-sionwasunderpressureduetodecisionsbytheg20thatweremotivatedbythe2008 f inancial crisis to immediatelycomeupwithaproposal,whichwasthenextensivelydebatedandcriticisedduringtheentireprocess.
Whatemergedfromthisprocesswasadirectiveataveryhighpoliticallevelandwheremanyofthemoretechnicalele-mentswerelefttoberesolvedatlevel 2.Andthelevel2measuresarecurrentlyunderdiscussionandinthepreparationphasewiththeeuropeansecuritiesandmarketsAuthority (esmAformerlyknownasCesr).AfirstconsultationhasbeenpublishedbyesmAaskingforfeedbackandinformationfromthealternative investment fund industrystakeholdersandmanyofthem,locatedinandoutsidetheeu,haveanswered.
WhatweatAlfihave stated fromthe start is thatweunderstood thewillingnessbyeuauthorities to tryandregulatenon-uCiTsfundsaswell.Thiscouldbeviewednotnecessarilyasaburdenbutalsoasanopportunitytocreateasecondfundcategorytomatchthe successof theundertakings forCollectiveinvestmentinTransferablesecurities (uCiTs)category,whichhasprovedvery successfulover thepast20years,emergingasanessentialcornerstoneinthedevelopmentoftheeuropeaninvestmentfundsindustry.
despitetheclaimedtechnicalsuccessesofAifmd,theimplementationphaseis likely tobe fraughtwithdifficul-ties.WhereasuCiTswasavoluntaryqualitybrandofferedtomanagerswhowanted tobenefit from it,Aifmdstemsfromtheg20anddoesnothavethatelementofvoluntaryapproach.howtocombinethemandmakethemworkcertainlyrepresentsamedium-termchallenge.
subjecttoaverylimitedsetofexemp-tions,theprovisionsofAifmdaffectallmanagersofnon-uCiTsinvestmentfunds,suchashedgefunds,realestateorventurecapitalandprivateequityfunds,whichare located ineurope(orevenoutsideeuropeiftheyaremanagedbyaneumanagerordistributedineurope)andwhichfalloutsidethescopeoftheuCiTsdirective, irrespectiveoftheirlegalformandregime.
Aifmdwill,forthefirsttime,intro-duceaharmonisedeuropeanregula-toryregimeformanagersofalternativeinvestmentfunds.TheAifmdirectiveisdesigned to address anumberofrisks identifiedby theeuCommis-sionrelatingtoalternativeinvestmentfunds, includingsystemicrisk.itwillrequirefromthemanagersofalternativeinvestmentfundsaboveacertainsizetoregisterandprovideregulatorswithdetailed informationontheprincipalmarketsandactivitiesofthefundsthattheymanage.
prACTiCAlimpliCATionsinadditiontosubjectingalternativein-vestmentfundmanagerstocompulsoryregulation in theeu,Aifmdwillrequiresignificantmodificationstothestructures,strategiesandoperationsoffundmanagersandfunds inthenon-uCiTssphereandwillalsodirectlyandmateriallyaffectthosethatservicethisindustry.
Alternative fund managers face changes but also opportunities arising from the AIFM Directive. This article aims to address the main implications and challenges for alternative investment firms in implementing the directive, focusing on the practical aspects in gearing up IT processes to accommodate the legislative provisions.
# AIFmD: changes and benefits in store for the European alternative fund industry
Camille Thommes is Director General of the Association of the Luxembourg Fund Industry (ALFI), Luxembourg.
Charles Muller is Deputy Director General of ALFI, Luxembourg.
in addition,Aifmdpresentsmajoroperational, complianceand reportingchallengesforfundmanagers.forone,de-positaryand(whereused)primebrokeragearrangementswillneedtobere-aligned.forthesecond,productsandserviceswillneedtobedesigned(orreconfigured)toprovideforagreaterflowofinformation,either toallowadepositary toperformitsrequiredfunctionsunderAifmdorwhereadministratorsareaskedtocopewiththeincreaseddemandforreportingcapacitybymanagerswhonowhavere-portingobligationstobothregulatorsandinvestors.forthethird,valuationprocessesandprocedureswillrequiremodification.Andfinally,demandforthird-partyassist-anceandassurancewillalmostinevitablyincreaseasaresultofAifmd.
inordertofindpractical,integratedsolu-tions to thechallengesposedby thesemultipleregulatorydevelopments,alter-nativeinvestmentmanagementorganisa-tionswillneedtoconsidertheirstrategicpositioning,identifyareasforchange,andplanforimplementation.Theywillneedtounderstandtheissuestheyarefacingandundertakeanadaptationprocessthrough
practical, economic, f inancial and iTsolutions thatare fullycompliantwithAifmdrequirements.
deposiTArYreQuiremenTsoneofthekeyareasalternativeinvest-mentmanagerswillhave toconsiderwhenadaptingtoAifmdwillbede-positaryrequirements.forbanksthatofferdepositaryfacilities(andmanyofthemdo),Aifmdinitscurrentformislikelytohaveahugeimpactontheirabilitytoservicefundsandassetsattheriskierendoftheinvestmentspectrum.in thewakeof thelehmancollapseandmadoffscandal,Aifmdhasbeenframed to considerably tighten theunharmonisedrulesunderwhichde-positarybanksoperateforthemoment.forastart,all funds–traditionalandalternativealike–mustnowprovidecustodyoftheirassets.
Aifmdcontainsextensiveprovisionsonthedepositary’sroleandresponsi-bilities, itsability todelegateand itsliabilitytothefundandinvestors.Theharsherstrictliabilityprovisionsprevi-ouslyproposedhavebeenmodifiedtobetter take intoaccounttheeffectivebusiness conditions,developments,structuresandvarietyofassets tobesafe-keptbyadepositary.Thereisnowpotentialscopeforadischargeofthatstrictliability,notablyinthecaseoftheuseofasub-custodianifcertaincondi-tionsaremet,andifthefundmanagerscandemonstratethatthelocaldeposi-tarysatisfiescertainqualitycriteria(duediligenceprocess).
Alternative investmentmanagerswillneedtoensuretheyhavetheresources(people and systems) to meet theAifmdrequirements,andpro-activelydemonstrate their preparedness toclients.Contractualarrangementswillneedtoberevised toref lect thenewregimeandensureappropriate infor-mationflows.Alternative investmentmanagementorganisationsneedtoas-sesstheimpactontheirbusinessmodel,operations,productofferingsandpric-ing,toworkoutwhatisdonebywhom,forwhomandinwhatbusinessarea,inordertostartevaluatingwhatchangesmayneedtobemade,bothinresponsetoobligationsimposeddirectlyonthemandtorespondtoclient-drivendemand.
vAluATionproCessesAnotherkeyareatoconsiderwhenadapt-ingtoAifmdprovisionstakestheformofvaluationprocessesandprocedures.Alternative investmentmanagersmayneedadditionalassistance tocomplywiththedetailedrequirementsontheseprocessesandproceduresunderAifmd.eachfund’sassetswillhavetobevaluedandthenetassetvalue(nAv)calculatedatleastonanannualbasis.open-endedfundswillberequiredtocarryoutmorefrequentvaluationsandnAvcalcula-tionsatafrequencyappropriatetotheassetstheyholdandtheirissuanceandredemptionfrequency,whereasclosed-endedfundshavetocarrythemouteachtimethecapitalof the fund increasesordecreases.moredetailsonvaluationrequirementswillcomeinthelevel2implementingmeasures.
“… AIFMD presents major operational, compliance and reporting challenges for fund managers.”
portfoliomanagementfunctionandthepersonsresponsible for implementingthefirm’s remunerationpolicy.somefundmanagersmaysimplynothavethepersonnelororganisational structuretopermitthemtodothis;othersmaychoosetooutsourceasamoreconvenientandcost-effectiveoption.
Alternative investmentmanagerswillneedtorevisittheirvaluationservices,andfactorthisandtheirincreasedliabil-ityexposureintotheirbusinessmodelsandproductofferings.TheywillneedtorevisevaluationprocessesandprocedurestocomplywithAifmd.iTsystemsmayrequireupgrading,andfunddocumenta-tionandsupplierswillneedtobeupdatedtoreflectthenewrequirements.
disClosurereQuiremenTsAlternative investmentmanagerswilla lso require more assistance withAifmd’sextensivedisclosureandre-portingrequirements.iTsupplierswillhavetoassurethat thereportingtheyprovideisfullycompliantwiththelevelofdetailexpected,andthattheirsystemsareable toproducetherequireddata.Complianceandlegaldepartmentswillneedtoensurethatallcontractualar-rangementsareappropriateincasethedataprovidedisdeemedtobeinsufficientbytheregulator.
underAifmd,alternativeinvestmentfundmanagerswillbeobligedtomakefulldisclosuretoinvestors(beforetheyinvest), includingadescriptionof theinvestmentstrategyandobjectivesofthefund,thetypesofassetsthefundmay invest in, the techniques itmayemploy,andtheprocedurestobeusedtoaltertheinvestmentstrategy.inad-dition,theywillhaveextensiveongoingreportingrequirementstoinvestors.Tohelpmeettheseobligations,supplierswillberequiredtoassistfundmanagerswiththeirincreasedreportingworkloadforinvestors.
“Alternative investment fund managers will also be required to make extensive disclosures to regulators in areas such as gearing, liquidity, risk management, trading activity, and information about portfolio investments.”
Camille Thommes is Director General of the Association of the Luxembourg Fund Industry (ALFI). Prior to joining ALFI in 2007, he worked for Banque et Caisse d’Épargne de l ’État, Luxembourg, where he held senior positions in the Securities Department before heading the bank’s In-vestment Fund Department in 2001. Camille Thommes started his professional career in 1986 at Banque Générale du Luxembourg (now BGL-BNP Paribas) where he held various positions in the cus-tody area. He is a member of several ad-visory committees to the Supervisory Commission for the Luxembourg Finan-cial Sector (CSSF) and represents ALFI at the Board of Directors of the European Fund and Asset Management Association (EFAMA), Finesti S.A., Profil S.A. and XBRL asbl. Camille Thommes holds a Master’s degree in Economics (section Business Administration) from the Uni-versity Louis Pasteur in Strasbourg, France.
Charles Muller has been Deputy Director General of ALFI since 2003 and is also re-sponsible for Legal Affairs, Promotion, Communication and Press Relations. Af-ter studying law in Paris („maîtrise en droit“ at the Sorbonne) and London (LLM at University College), Charles Muller be-came a Luxembourg barrister („avocat à la Cour“). In 1994 he joined Banque Géné-rale du Luxembourg, where he held vari-ous legal positions in the retail, corporate and private banking departments, before being appointed the bank’s Deputy Secre-tary General. Charles Muller is also a former Board member of the International Investment Fund Association (IIFA), a Board member of the European Federation for Retirement Provision (EFRP) and a member of the Management Committee of the European Fund and Asset Manage-ment Association (EFAMA).
s olvencyiibringsafundamen-talchangetotheregulationofinsurancecompanies in theeu.Therequirementsofthe
newprinciples-basedregime,whichareprovingtobeahottopicfordebateanddiscussion,canbebroadlydividedintothreepillars.Thefirstpillar sets therequirements for thecapitaladequacymodels.Companiescanchoosewhethertouseastandardmodelortodevelopafullorpartialinternalmodel.
The f ifthsolvency iiQuantitativeimpactstudy(Qis5)raisedtheaware-nessof thefundamentalrevolutionintheregulatoryrequirements.Thebroadspectrumofpossibleconsequencesoftheregulatorychanges,inareassuchasproducts, investmentmanagementandthestructureoftheinsurancemarket,isbeginningtobecomeclear.oneofthemostobviousconsequencesistheeffectonassetallocation.
Standard modelforpillar1,insurerscanusethestand-ardmodeltodeterminetheirsolvencyCapitalrequirement(sCr).inmanyeucountries,themajorityofinsurancecompanieswillusethestandardmodel,becausesmallerandmid-sizedinsurerslackthecapabilitytodevelopafullorapartialinternalmodel.however,withinitsoverallstructure,thestandardmodeltakesonlylimitedaccountoftheactualinvestmentriskprofileofthecompany.
Theinterestriskisbasedontwopre-definedyieldcurvestowhichasteepincreaseordecrease in interest ratesisapplied.insurancecompanieshavetoconsiderboth:investmentsthataresensitiveto interest-ratechangesandtechnicalreservesthatarevaluedbasedonyieldcurves.Themarket risk for
Solvency II requirements and their practical implementation pose a number of issues for investment management organisations – currently and in the near term up to 2013. This article outlines how and in what ways investment management companies will need to prepare their IT infrastructures and investment manage-ment systems for Solvency II.
# Solvency II: what it means for investment management systems
Dr. Thomas Varain is a Partner and Swiss Insurance Head at KPMG, Zurich, Switzerland.
Dr. Peter Ott is a Partner at KPMG, Munich, Germany.
“Also in the short and medium term, the data management and data
quality requirements resulting from Solvency II will be a huge challenge
for insurance companies and their asset management.”
AsseTmAnAgemenTChAllengesbasically,all threepillarsarerelevantfor the investmentsof an insurancecompany andsolvency ii thereforesetsdemandsonassetmanagementcompanies.initially,theimplicationsofsolvencyiiforassetmanagementwerenotentirelyclear.Therefore,itisallthemoreimportantfortheindustrytoadjusttothecomingdevelopmentsandbeabletomakethenecessarychanges.
Thecomplexityofmodelsintheinsur-anceindustryhasincreasedsignificantly.Whereasinthepast,themodelsfocusedoninsuranceriskandactuarialreserves,today,assetsarebecomingmoreandmoreimportant.insurancecompaniesareforcedtodeveloptheirownmodelsfor investments if thestandardmodeldoesnotadequately ref lect their riskprofile.
ThecalculationofthesCrrequireslargeamountsofinputanddatathatofcoursehave tobeavailable for investmentsaswell.here theassetmanagementcompaniesarechallengedbecausetheyhavetoprovidemostofthedata.duetotheimportanceofdata,iTsystemsandtechnologyinsolvencyiirequirements,itisimportantthattheyareconsideredfromthebeginning,eventhoughtheimplementationofthemarketandcreditriskmodelsisnotyetfullycompleted.
Theassetmanagementindustryshouldnotneglect this important factorandshouldnotrelyontheinsurersneedingacertaintimeuntilthemodelsarefullyimplemented.inaddition,therequire-mentfordataisnotlimitedtocompa-nies thatdevelopan internalmodel.Thestandardmarketriskmodelundersolvencyiirequirescertaininformation
whichassetmanagementisoftennotyetabletoprovide.
Biggest challengeThebiggestchallengeforassetmanage-mentisthatcompanieshavetobeabletomanageandprovideallthedatathatfeeds intothecalculationofsolvencyrequirementsaswellasfinancialandregulatoryreporting.Thisincludes, inparticular,thedataqualityrequirementsanddatabeinguptodate.solvencyiirequiresthatthedatausediscomplete,appropriateandaccurateandempha-siseshowimportantthequalityofdatais for theeffective implementationofsolvencyii.Thisgoesforbothinternalandexternaldata.
Data qualitydataqualitywillalsobeofhighim-portance in areas lookedatby theregulator,suchastheinputandoutputdatafortheownriskandsolvencyAssessment(orsA),theuse-Testandthedatathatisrequiredfordisclosures,e.g.solvencyandfinancialConditionreport(sfCr),reporttosupervisor(rTs)andQuantitativereportingTemplates (QrT). it isunavoidablethatdatausedisvalidatedandsubjecttoaqualityassuranceprocessandthatalldataanditssourcesaredocumentedandarchived.
The Berlaymont building hosts the EU Commission,s
headquarters in Brussels
“Solvency II has multiple im plications for the systems,
processes and controls within the infrastructure of asset management.”
Asinsurancecompaniesmustdemon-stratetheircompliancewithsolvencyii,theywillalsohavetoobtainconfir-mationofcompliancefromtheirassetmanagers,astheymayhavetoshowthistotheregulator.insurerswillalsoprob-ablywanttoperformtheirownchecksonassetmanagers toensure that thesolvencyiirequirementshavebeenmet.
High complexityThecomplexityofassetmanagementforinsurancecompaniesishighduetothedifferencesintheindividualinvestmentportfoliosof insurancecompaniesandtheresultingdifferentlevelsofgranular-ityoftherequirements.examplesofdatarequiredinclude:quotedmarketpricesandyieldsofbondsandequities;detailedinformationonderivatives;geographicaldataontheindividualassets;andinfor-mationonguarantees.
Asaresultofsolvencyiiandthenewdisclosureguidance, it isalsopossiblethat insurancecompanieswill requirecertaindatamoreoftenthanhasbeenthecaseuntilnow.
implemenTingThereQuiremenTsTheadministrationofinvestmentdatawillbemorecomplex forcompaniesundersolvency ii compared to thepreviousregulatoryregimes.This in-cludes,forexample,thecomprehensivedocumentationofdataflows.dataman-agementwillalsohavetobeadaptedto ref lect thenewenvironment.Weexpectthattheimportanceanduseofdata-repositoriesanddatawarehous-ingsystemswillincreasesignificantly.smallerandmid-sizedassetmanagerswillprobablynotbeabletomeetthenewrequirementswithoutacompre-hensivedatamanagementsystem.
inTegrATedsoluTionpriortothestartofalargeandexpen-siveprojectto implementthechangesrequired,companies in theassetandinvestmentmanagementindustryneedtoclearlyunderstandtheirpositionwithregard to thegovernance,definition,qualityandreportingofdataandwhatisexpectedoftheminthefuture.
Thisrelates to therequirements fromsolvencyiiandalsototheneedsofcli-ents,i.e.whatkindofdataandreportsinsurancecompanieswillrequire.inthefuture, itwillbeunavoidableforcom-paniestomaintainacomprehensiveandconsistentdatamanagementsystem,in-cludingappropriategovernance.invest-mentmanagersshouldcheckinwhichareasadaptationsandenhancementsarerequired, includingrelevantprocesses,controlsandgovernanceguidelines.
Dr. Thomas Varain is a Partner and Swiss Insurance Head, Audit Financial Services, KPMG, Zurich, Switzerland. He is in charge of the KPMG insurance audit prac-tice and co-ordinates KPMG’s service of-fering towards insurers. With 14 years of experience providing audit and advisory service to international insurance compa-nies, he started his career with KPMG Co-logne. Thomas Varain has extensive expe-rience in the audit of international insurance companies and is specialised in accounting and regulatory issues, as well as in insurance asset management. A Certi-fied Accountant (D), he holds a business administration degree from the University of Passau, Germany, and a Ph.D. from the University of Goettingen, Germany.
Dr. Peter Ott is a Partner at KPMG in Munich, Germany. Specialising in Sol-vency II and risk management for insur-ance, he has been a Partner in Financial Services at KPMG in Munich since 2005, where he has headed KPMG’s Solvency II projects and initiatives since 2006. With 15 years of experience providing audit and advisory services to insurance companies, he started his career with KPMG Munich. Peter Ott has extensive experience in the audit of insurance companies and is spe-cialised in accounting and actuarial issues, as well as in insurance asset management. A Certified Accountant (D) and an actu-ary he holds a Ph.D. in business adminis-tration and a Master’s degree in business research (MBR) from the University of Munich, Germany.
KPMG
Kpmg is a global network ofprofessional services firms pro-viding audit, tax and advisoryservices. With 140,000 profes-sionals working together to de-liver value in 146 countriesworldwide, Kpmg operates asan international network ofmember firms, working closelywithclients,andhelpingthemtomitigaterisksandgraspopportu-nities.moreinformationatwww.kpmg.com.
“Data and IT systems are key building blocks of the asset management business, and companies should place a high value on being able to build on an appropriate and solid foundation.”
providevaluationandcalculaterisk;• flexibility in on-boarding new
workflowsintoexistingfront-officeapplications.
eXposureToolboXoTCderivativesare indeedcomplex,both in their structure and in theirimpactontheinvestmentportfolio.Thebasicassessmenttomake is:does thefrontofficehaveallthetoolsnecessarytodeterminetheirvariousexposurestorisk?doesthefrontofficeusedisparateplatformstomanageinvestmentslead-ingtoaninabilitytoholisticallyreviewrisks?Anincreasedfocusonrisks,andlessonslearned,willleadtoapushforiTtoprovidetoolsthatallowforagreaterunderstandingofcurrentrisks.
Evident during the recent financial crisis, and in the context of current regula-tory reform, is the high level of systemic risk that exists as a by-product of the use of over-the-counter (OTC) derivatives. This article assesses the front-office tools needed to effectively manage their use, and previews the potential effects of changes in market structure on the IT demands of the front office.
# Challenges in the front office: new regulations
force derivatives market overhaul
Brent Rossum is Domain Manager, North America Front Office, SimCorp NA.
“An increased focus on risks, and lessons learned, will lead to a push for IT to provide tools that
allow for a greater understanding of current risks.”
Directionality of exposureexposureisalsoafactorofleverage,asanyderivative–eitherexchange-tradedoroTC–willincreaseexposuretocer-tainriskswithoutacashoutlaytoactu-allypurchasetheunderlyingsecurity.AkeytooltoassessthedegreeofleverageissyntheticCash(alsoknownasvirtualCash)–theamountofcapitalsavedbytransactinginaderivativeversusadirectpurchaseof theunderlying security,indexorriskfactor.
systematicriskpresentinequities, justasentering intoapayfixedinterestrateswap lowersexposure to risinginterest rates.Thechallenge for thefrontoffice(assumingtheoTCmarketcontinuestoofferthecurrentbreadthofproducts)comesfromthecomplexityofintelligentlyrepresentingthesingleriskfactordirectionalityofmulti-legoTCderivatives.
Credit ratings and credit spreadsAnothereffectof the financialcrisisconcerningallmarketparticipants,andalsocoveredby thedodd-frankAct,isregulationandtheroleofratingagencies,theirbusinessmodelandtheefficacyof theircreditanalysis.evenabovetheapparentconflictofinterestofhavingissuerspayforbondratingsishowusefulthesemeasuresare.marketsmovefaster thanrevisionsofcreditratings,so incorporationofmeasuresofcreditworthinessmustcomedirectly frommarket sentiment as representedbyspreadlevelsinthecreditmarkets.
where theagenciesbelieve it should.bondsandCdsstradeinrelated,butdistinctmarkets.Thecrisisbroughtto lighthowquicklytheCdsmarketassesseschangesincreditcomparedtotheslowprocessofreviewingcreditrat-ings.measuressuchasimpliedCdsparspreadsbridgethisgapbymeasuringthecreditspreadofabondimpliedbytrad-ingactivities intheCdsmarket,andincreasestheabilityofthefrontofficetorespondtochangesinmarketsentimentacrossissuersandindustries.
“The challenge for the front office (assuming the OTC market continues to offer the current breadth of products) comes from the complexity of intelligently representing the single risk factor directionality of multi-leg OTC derivatives.”
Overhaul of the marketWhiledodd-frankattemptstoreducethesystemicriskinherent inthetrad-ingofoTCderivatives,itonlysetsthefoundationsforthisnewstructure,notthespecificdetails,asseeninthisexcerptfromthedodd-frankAct:
it is tobenotedthatdodd-frankdoesnotspecifyexecutionmethodorpricedis-coverymechanicsoftheswapexecutionfacility(sef),norifthisissimplyanewnameforexistingproviders.AstheCfTCclarifiestherulesgoverningsefs,itwillbedefinedhowpricesarenegotiated.intermsofpricediscovery,themethodchosenwillhaveadirecteffectoncurrentfront-officesystems if straight-throughprocessing(sTp)isanorganisationalgoal.forexample,a‘requestforquote’issimilartohowbondstradeelectronicallyandis
ThedevilisinThedeTAilsAnoverhaulofthesystemthatdrivestheoTCderivativesmarket, throughdodd-frankandassociatedrules,offersanopportunitytoreview,andpossiblyretool,theapplicationsthefrontofficereliesupon tomanage investments.At this stage,more isunknownthanknown,andthemainfocusoverthenextyearwillbetostandreadytoadoptthechangesinmarketformandstructure,whilecontinuing tomanage the riskinherentinthecurrentsystem.
Brent Rossum, CFA, is Domain Manager for Front Office in SimCorp North Amer-ica. He holds a B.Sc. in Economics from the University of Minnesota, USA, and an M.Sc. in Finance from the ICMA Centre, University of Reading, UK. Prior to join-ing SimCorp in 2010, he worked in front-office product management at Bloomberg, TradeWeb and Charles River Develop-ment.
CCP (Central Counter Parties)
Buy-side Dealer
DTCC (Depository Trust and Clearing Corporation)
Exchangetrading Negotiation
Processing and con�rmation
SEF(Swap Execution Facilities)
Figure 1. Proposed OTC
framework.
“An overhaul of the system that drives the OTC derivatives market,
through Dodd-Frank and associated rules, offers an
opportunity to review, and possibly retool, the applications
the front office relies upon to manage investments.”
i n2010–11,thesimCorpstrategy-labresearchprogrammefocuseson the threemajor sectorsoftheglobal investmentmanage-
mentindustry: investmentfunds;assetmanagement;andpensionandinsurancefunds.Alltheserespectivesectorsfaceauniquesetofstrategicandtacticalchal-lenges.focusingonthesechallenges,simCorpstrategylab in itscapacityasanindependentresearchinstitutiongathered leading industryrepresenta-
With the purpose of identifying and examining key investment management in-dustry challenges, thought leaders representing the industry and renowned academic institutions gathered at the SimCorp StrategyLab Copenhagen Summit 2011 meetings in February and March.
# SimCorp StrategyLab hosts Copenhagen Summit 2011: high-level industry representatives and academics convene to discuss key challenges
Lars Falkenberg is Assistant Director at SimCorp StrategyLab
“The aim (...) was to generate and contribute substantial knowledge
about key investment manage-ment industry challenges and to
announce recommended solutions of value to the industry.”
Members of the Pension and insurance funds group discuss key industry challenges under the guidance of group head Professor Massimo Massa, INSEAD.
seCTorgroupsThree teamsof thought leaders fromacademicinstitutionsandtheindustrywerecreated,withdesignatedsectorleadersteamingupwithadistinguishedacademicconductingresearchintheareaaswellasindustryspecialists.Thesespe-cialistsincludedoneormorerepresenta-tivesfrommajorsimCorpclientsandonethoughtleaderfromsimCorpitself.
At the individual sectorgroupmeet-ingsinCopenhagen,thethreegroupsdiscussed thekey issuesof risk,costandgrowthspecificallyrelatedtoeachofthethreesectorsunderexamination:investment funds;assetmanagement;andpensionandinsurancefunds.
oTherACTiviTiesAmongsimCorpstrategylab’sotheractivities for the2010–11periodandfollowingupitsexcellenceAwards2010,simCorpstrategylabisseekingappli-cantsforthesimCorpstrategylabex-cellenceAwards2011,whichwillawardoutstandingandinnovativeleadersintheabilitytomitigaterisk,reducecostandenablegrowth.Thethreewinnerswillbeannouncedataceremonyon29sep-tember2011atthesimCorpdimension
Lars Falkenberg (MA) is Senior Vice Pres-ident, Head of Global Product & Market-ing Management at SimCorp and Assist-ant Director of SimCorp StrategyLab. Before his role at SimCorp, Lars Falken-berg gained international senior manage-ment experience in asset management from one of Europe’s top 12 financial institu-tions. Executive education and training in international banking and finance at e.g. INSEAD and the Swiss Finance Institute supplements his theoretical background.
A sanassetmanagerorpen-sion trustee,you shouldworrylessaboutthestocksandproductsyoupickfor
yourclientsandmoreaboutgettingyour fundamental investmentbeliefsright.Afterasteepdeclineintheglobalstockmarketsanda recovery that isstilluncertain, it issimplynotenoughtohaveagoodorganisation,goodstaffandawell-definedmission.Youneedtoformulateyourownsetof investmentbeliefs:aclearviewonhowyouperceivethewaycapitalmarketswork,andhowyourfundcanaddvalueandstriveforexcellence.funds thatestablishandimplementawell-defined investmentphilosophyhavebeenshowntoearnconsistentlybetterresults.
Thebookprovidesatimelyoverviewof themajordebates in the industryandanintroductiontotheissuesthatmatterforlong-termsurvivalinfinan-cialmarkets.Withinvestmentbeliefsfirmlyinplace,youwillbeabletomoreeasilynavigatetheinvestmentoptionsavailable,knowingthatyourchoicesanddecisionsare inaccordancewithyourvaluesandobjectives.successfulimplementationof investmentbeliefsmightwellbeoneofthedecisivefac-torsinbecomingawinneror loserintheinvestmentmanagementindustryin2020.
KEES KOEDIJK is Professor of Financial Management and Dean of the Faculty of Economics and Business Administration at Tilburg University, the Netherlands. He has won several awards for his research on sustainable development. He has published extensively on finance, European integra-tion, and monetary policy.
ALFRED SLAGER is Chief Investment Officer at Stork Pension Fund and affiliated to Tilburg University, the Netherlands. His expertise includes international financial services, with a particular interest in asset management, pension fund and banking strategies. He publishes regularly on pen-sion and investment management subjects.
# Financial markets and Organizational technologies: System Architectures, Practices and Risks in the Era of Deregulation
ALEXANDROS-ANDREAS KYRTSIS is Professor of Sociology at the University of Athens, Greece. Previously, he worked as an adviser for banks and IT firms. His current research focuses on the analysis of the techno-organisational backstage of financial markets.
Alexandros-Andreas Kyrtsis (Ed.), Palgrave Macmillan, July 2010
BOOK REVIEW:
BOOK REVIEW:
# Investment Beliefs: A Positive Approach to Institutional Investing
Kees Koedijk and Alfred Slager, Palgrave Macmillan, December 2010
Regulatory update This regulatory update covers major new regulatory requirements and significant developments that affect the investment management industry.
nAiCAdopTsAnumberofmeAsuresfromheAlThCArereformTosolvenCYrisKAssessmenTTheusnationalAssociationofinsuranceCommissioners(nAiC),whoseoverridingobjectiveissupportingstateinsuranceregulatorsastheyprotectconsumersandmaintainthefinancialstabilityoftheinsurancemarketplace,passedanumberofregulatoryinitiativesduringaspecialjointconferencecall on 17 december 2010. The passing of the initiatives is meant todemonstratetheorganisation’scommitmenttoconsumerprotectionwithinthecontextofstablemarketsandeffectiveregulation.Amongtheinitiativespassed were: The American health benefit exchange model Act, AnupdatedmodelbulletinontheuseofretainedAssetAccounts,Therevisedinsurance holding Company system regulatory Act and insuranceholdingCompanysystemmodelregulation.
iAsb&fAsbissuelATesTreporTonefforTsToConvergeifrsWiThusgAApsincethelastprogressreportwaspublishedinJune2010,theboardshavejointlyissuedmajorexposuredraftsonleasesandrevenuerecognition,completedthefirstphaseoftheConceptualframeworkprojectandbegundiscussions to seek to align their respective financial instrumentsaccountingproposals.Theboardshavealsofurtherprioritisedboardtimeavailabletodiscussconvergenceprojects. http://www.ifrs.org/nr/rdonlyres/26fA84e8-631d-44A8-AAAb-AA60f40b647e/0/moustatusupdatenov2010.pdf
disClosureforAsseT-bACKedseCuriTiesreQuiredbYseCTion943ofTheWAllsTreeTreformAndConsumerproTeCTionACT(dodd-frAnKACT)The latestofmanyprovisions tobe implementedunder thedodd-frankAct, the disclosure rules for asset-backed securities (Abs) are set to beenacted on 28 march 2011. The final rules require securitisers of asset-backedsecuritiestodisclosefulfilledandunfulfilledrepurchaserequests.Therulesalsorequirenationallyrecognisedstatisticalratingorganisationsto include information regarding the representations, warranties andenforcementmechanismsavailabletoinvestorsinanasset-backedsecuritiesoffering inany report accompanyinga credit rating issued inconnectionwithsuchanoffering,includingapreliminarycreditrating.
finAnCiAlserviCesregulATionineuropeTurnedoverToThreeneWsupervisorYbodies(esA)inorderTohArmoniseregulA-TionsACrossmembersTATesfrom January 2011, the regulationof financial services acrosseurope isnow overseen by three european supervisory Authorities (esAs). TheesAs work with the newly established european systemic risk board(esrb)toensurefinancialstabilityandtostrengthenandenhancetheeusupervisoryframework.Theywillimprovecoordinationbetweennationalsupervisoryauthorities, suchas thefsA,and raise standardsofnationalsupervision across the eu. The esAs are the european securities andmarketsAgency(esmA),theeuropeanbankingAgency(ebA)andtheeuropeaninsuranceandoccupationalpensionsAuthority(eiopA).
luXembourgisfirsTCounTrYTorATifYuCiTsivTheuCiTsbrandcelebratedits25thbirthdayattheendoflastyear,asthefirstuCiTsdirectivewasformallyadoptedon20december1985.Almostexactly25yearslater,on16december2010,theluxembourgparliamentratified uCiTs iv. As was the case in 1985, luxembourg is the firstcountryintheeutopassthisnewregulationintonationallaw.Anumberofprovisions (suchas fiscal reliefs)came intoeffectas soonas1 January2011.
http://www.alfi.lu/newsletter/alfi-newsdigest
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solvenCYii:QuAnTiTATive&sTrATegiCimpACT–TheTideisgoingouTAsthesolvency2deadlinemovescloser,andtheframeworkitselfbecomesclearer,thestrategicimplicationsfortheindustrycometotheforefront.Thisreporttakesthe viewpoint that solvency 2 will act as a catalyst for significant change withprofound strategic impacts. oliver Wyman, jointly with morgan stanley, hasapplied the solvency 2 framework to the industry overall and on individualbusinessmodels.basedonthisproprietaryanalysis, thereportshowsamong itsfindingsthatthesolvencyratiosofeuropeaninsurerswilldecreasefrom~200%undersolvency1to~135%undersolvency2onaverage;afundamentalreappraisaland restructuring of traditional participating business can be expected; cost ofcapitalislikelytoincreaseintheshort-term;reinsurerswillbewinnersofsolvency2,whilegeographicallylocalised,smallerinsurers–includingmanymutuals–maysuffer; a step change in Alm capabilities and an adjustment of investmentstrategies is required; and european groups may need to reconsider theircompetitiveposition inmarketswith ’non-equivalent’ regulation,as theusAislikelytobe.
europeAnfundmAnAgemenTindusTrYneedsbeTTergrAspofnon-finAnCiAlrisKsThispublicationlooksintohownon-financialrisksandfailureshaveimpactedtheregulatoryagendaineuropeandtracesthemanagementofliquidity,counterparty,compliance,misinformation,andotherfinancialrisks inthefundindustry.byidentifying thedistributionof risksandresponsibilities in this industry, thepublicationexamineshowconvergencebetweencountryregulationscouldbeachieved.finally,thepublicationassesseshowfundunit-holderscanbeprotectedinthebestwaywithappropriateregulations,improvedriskmanagementpractices,andgreatertransparency.
Since 1971, SimCorp has been providing investment and portfolio management software and services to the world’s leading investment managers, asset managers, fund managers, fund administrators, pension funds, insurance funds, and wealth managers. SimCorp’s world-class software provides global financial organisations with the tools they need to mitigate risk, reduce cost, and enable growth. SimCorp is a global company, regionally covering all of Europe, North America, and Asia Pacific. Listed on the NASDAQ OMX, SimCorp is dedicated to supporting the global investment management industry, its clients and its investors. For more information about SimCorp’s products, please visit www.simcorp.com/products.