REVISED Operational Process & Fund Administration - Best Practices

Information about REVISED Operational Process & Fund Administration - Best Practices

Published on August 10, 2014

Author: Miles.Peterson



Operational Process and Fund Administration – Best Practices for Regulator Scrutiny: Operational Process and Fund Administration – Best Practices for Regulator Scrutiny Thursday, March 13, 2014 Table of contents: Table of contents Achieving growth 3 Outsourcing 4 Shadowing 5 Data - Key areas to focus on 6 Data - GIPS 7 Data - Commonalities 9 Information security 10 Security challenges for managers and fund administrators 11 What managers and fund administrators should be doing 12 What is next – More transparency 13 Concluding Remarks 16 Achieving growth: Achieving growth Managers are no longer relying on increased headcount to achieve growth. Looking at infrastructure improvements Achieving scale through better integration of front, middle and back office Good data management practices are key including information security Use of best in class technology Outsourcing Outsourcing : Outsourcing Managers are reducing middle-office headcount by outsourcing. Having already largely outsourced back-office functions, managers are seeking additional operational efficiencies by outsourcing technology, legal, compliance and middle-office services Best in class outsourcing providers offer data storage capabilities for the middle office and portfolio management, collateral management, as well as risk and regulatory reporting Shadowing: Shadowing Managers generally continue to fully shadow, but there is a growing trend to pare down shadowing. Majority of managers fully shadow and the cost of shadowing is significant Growing number of managers have developed stronger relationships with fund administrators and are paring down full shadowing To reduce shadowing, managers need a higher level of integration with their fund administrator and support from investors Data - Key areas to focus on: Data - Key areas to focus on As managers seek efficiencies from technology and outsourcing, they will need to address data challenges. Becoming a key strategic priority to support Effective risk management and achieving operational efficiency Higher levels of integration between systems and outsourcing partners Ability to leverage technology Data governance and management Availability – disparate systems Accuracy – manual processes Timeliness Data - GIPS: Data - GIPS What is GIPS Standards Introduced in 1999, GIPS are universal, voluntary standards to be used by managers for quantifying and presenting investment performance that ensure fair representation, full disclosure and apples-to-apples comparisons They promote fair representation and full disclosure of the manager’s performance figures Global standardization of performance reporting guidelines enables investors to compare firms on a global level and allows investment managers to compete in foreign markets Creates an even playing field for firms and also gives current and potential clients more confidence in the integrity of the performance presentations Administered globally through the thought-leadership and policy-setting arm of the CFA Institute Who benefit from the GIPS The GIPS standards benefit two main groups: managers and and investing or prospective clients Data - GIPS (continued): Data - GIPS (continued) Why Move to a Global Standard Many managers not only compete for business in their home markets, but in foreign markets as well – for firms outside the U.S. or European Union, being GIPS compliant can provide legitimacy and give investors confidence that the firm strives to meet the highest standards Being GIPS compliant can actually make things easier for firms that are trying to compete in multiple markets, because they only have to abide by one set of standards and they can avoid having to make major changes in their presentation or calculation methods when working in other countries - GIPS fill a need for standardization Investors have a greater level of confidence in the integrity of performance presentations, as well as general practices of GIPS compliant firms Investors can more easily compare performance presentations between different strategies and firms across the globe The GIPS standards represent industry best practices and compliance demonstrates a firm’s commitment to ethical practices Firms complying with the GIPS standards benefit from the standardized framework and internal controls that ensure consistent and directly comparable investment information GIPS standards are voluntary, leading to more effective and efficient investment markets Data - Commonalities : Data - Commonalities The amount and frequency of information communicated to the regulators and other entities will continue to accelerate through 2018 Reporting requirements for each regulation and entity are not entirely unique The chart to the right stratifies the required data points by reporting requirement and data category Analyzing the chart, we see quickly that there are significant data commonalities across the various categories, which emphasize the need for a strategic approach Commonalities Reporting requirements require common data with the flexibility to satisfy all requirements Information Security: Information S ecurity There is a building sense of urgency relating to information security. Fast changing technology has created gaps in information security (IS) coverage Growing number of cyber criminals eager to exploit these gaps T he question is not ‘if’ cybercrime will occur, but rather ‘when ’ O rganizations responding by improving capabilities and increasing investments Moving from operations and maintenance toward improving and innovating But investments and technical capabilities are not coping with today’s hackers and attackers In January 2014, U.S . SEC said they plan to scrutinize whether asset managers have policies to prevent and detect cyber attacks and are properly safeguarding against security risks that could arise from vendors having access to their systems (Source: http:// ) Security challenges for managers and fund administrators: Security challenges for managers and fund administrators Unaware of existing incidents, or limited ability to detect Have not adapted to emerging risks around mobile, cloud, social Reactive versus proactive security Driven by compliance Spend is not optimized or inefficient Strategy not aligned to business objectives or lack of defined strategy Security positions are not appropriately filled; internal technical skills lacking Awareness is lacking sponsorship Security posture lags other industry peers What managers and fund administrators should be doing: What managers and fund administrators should be doing Develop a security strategy focused on business drivers and protecting high-value data Define the organization’s overall risk appetite Identify the most important information and applications, where they reside and who has/needs access Assess the threat landscape and develop models highlighting your real exposures Assume breaches will occur – improve processes that complicate, detect and respond Balance the fundamentals with emerging threat and vulnerability management Establish and rationalize access control models for applications and information Protect key identities and roles because they have access to the crown jewels Get governance right – make security a board-level priority Allow good security to drive compliance – not vice versa Measure leading indicators to catch problems while they are still small Accept manageable risks that improve performance Know your weaknesses – and address them! Make security everyone's responsibility — it's a business problem, not just an IT problem Align all aspects of security (information, privacy, physical and business continuity) with the business Spend wisely in controls and technology – invest more in people and process Selectively consider outsourcing or co-sourcing operational security program areas Sustain your security program: Embed security in the business: Identify the real risks: Protect what matters most: “Corporations need to figure out what their crown jewels are. You can't protect everything and defend your entire corporate network equally. It's not all equally important, either.” Richard Clarke, “Preparing for a future Cyber War, http:// /s/article/9182783/ Richard_Clarke_Preparing_For_A_Future_Cyberwar What is next?: What is next? Next phase of investor pressure on managers beyond the independent fund administration will be on more transparency into several areas. Expect more transparency: Expect more transparency Efficiently and accurately mining regulatory and risk reports will be key. Opera – O pen P rotocol E nabling R isk A ggregation Objective is to standardize reporting procedures for the collection , collation and conveying risk and exposure information Comprises a template and a manual which enable managers to report their risk and exposure information periodically in a consistent format Produced by an independent working group, industry bodies and regulators invited to observe, refined by a process of public consultation Expect more transparency: Expect more transparency Benefits – Opera allows: Investors to aggregate and integrate all their investment exposures and to pro actively manage their risks Managers to reduce the number of investor-specific risk reports requested of funds over time and attract more stable institutional investors Regulators to measure and monitor systematic risks arising from the hedge fund industry Concluding Remarks: Concluding Remarks

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