Asset management under regulatory fire
The challenge facing asset management companies is to adapt their information systems without undermining their overall consistency… and without putting a strain on their budgets.
In the past few years the asset management industry has been engulfed by a tidal wave of new regulations, such as Ucits IV, AIFM, Solvency II, Emir (European Market Infrastructure Regulation), Fatca (Foreign Account Tax Compliance Act), etc. This regulatory onslaught has been particularly burdensome because "apart from regulatory measures concerning it directly the asset management industry is caught in the crossfire of measures applying to other financial institutions", notes Stéphane Janin, Head of Regulatory Affairs at the AFG (French Asset Management Association). These constraints also have implications for information systems: "Over the last three years, the IT (computer), datastream and organisational aspects of our information systems (IS) have been reconfigured in order to meet the needs of our institutional clients, in particular in the wake of regulatory changes", confirms Olivier Bibiano, Head of Risk Management at La Banque Postale Asset Management (LBPAM), which has 130 billion euros of assets under management. Despite this accumulation of changes, managers of information systems are attempting to maintain a certain consistency as regards their IS as a whole: "We need to define their upgrade trajectory over several years in order to construct them seamlessly and avoid stacking multiple systems", emphasises Nicolas Neurdin, Chief Information Officer at LBPAM.
Ucits IV: major adaptations
Ucits IV, the most recent major reform concerning the asset management industry directly, entered into force in July 2011 and has resulted in several new constraints, in particular the obligation to produce a KIID (key investor information document). The production of the KIID is far from being a minor task and has forced the asset management companies that have decided to produce these documents in-house, rather than outsourcing their production, to mobilise significant resources. Most have taken advantage of the opportunity to improve and reorganise their referencing systems which are essential for the efficient production of this new reporting document, which summarises a range of information, generally drawn from several software components. For example, at CPR AM, "the information needed to produce the KIID, already available in-house, has been supplemented by an upgrade of the product referencing systems and by in-house calculation tools for calculating the SRRI - Synthetic Risk and Reward Indicator", explains Philippe Bourgues, Operations Officer. The project, launched in September 2010, involved a full-time project leader and two computer technicians for several months.
OFI AM has adopted the same approach, viewing this regulatory adaptation as an opportunity to upgrade its product referencing system via an enhanced portal, called BOP (OFI Product Base). "This development project was an opportunity not only to standardise and structure our systems, but also to reorganise the data input of our product databases, synchronise them and improve data governance by specifying the role of the various contributing departments", explains Pascale Gabriel, Head of Information Technology at OFI AM. The application, which was developed in-house, required 150 man-days: although it was a substantial project, it has brought significant benefits. At EDRAM, Cédric Le Moan, Head of Business Management and Projects, emphasises the budget benefits of keeping the production of this type of document in-house: "In the event of an increase in the number of funds or units, we assume a fixed cost, whereas outsourcing would have resulted in an increase in the variable costs." The return on investment is measured therefore in terms of cost. But this is not the only factor and Flavien Duval, Chief Risk Officer at EDRAM, considers that "the production of calculations and reports is strategic, in the same way as management. It is indispensable to be able to detect rapidly changes in indicators and be in a position to analyse theme". This not only considerably boosts our reactivity, but also enhances the quality of service provided to investors.
Solvency II: major commercial issues
With the upcoming entry into force of Solvency 2 for insurance companies, which represent the bulk of assets under management of certain asset management companies, the pressure on the latter is mounting, since only a handful of their insurance clients have the means of satisfying all the new requirements, in particular as regards the calculation of the regulatory capital in respect of their portfolio exposure. Consequently, the majority of such insurers are looking to asset management companies to provide them with this information in a comparable format. "This is already apparent in calls for tenders which specify that the management company must be capable of managing under SCR (Solvency Capital Requirement) constraints and providing multi-form reporting, notes Olivier Bibiano. Potentially, this may lead to a reconfiguration of market share, as some institutional clients are considering concentrating their calls for tenders on a single asset management company, capable of providing, in addition to management services, the depth and quality of information requested." At CPR AM too, "Solvency II was immediately considered as a strategic project, because of the significant marketing and IS implications", stresses Philippe Bourgues.
Data quality has been prioritised in the main Solvency II related projects. "The main challenge was to standardise data in order to be in a position to acquire and transform them, explains Nicolas Neurdin, Chief Information Officer of LBPAM. The solution involved very wide-ranging data standardisation work, via a data management project launched in 2010." At some asset management companies, the work carried out was also an opportunity to rationalise the acquisition of financial data, especially as "the increased transparency of UCITS has doubled the number of instruments managed in our IS", notes Stéphane Dorlencourt, Head of Risk Management at OFI AM.
In addition to the ‘data’ aspect, Solvency II also involves ‘calculation’ and ‘reporting’ components. Some players have chosen to develop all these components in-house, in the same way as OFI AM: "The specific rating engines put in place in the framework of Ucits IV are used to calculate the SCR, points out Jean-Robert Hervy, Head of the Cross-Functional Middle-Office at OFI AM. The SCR is now published at the end of every financial year for open UCITS." The same is true at EDRAM, where the data necessary for the calculation of the SCR (results of shocks) are produced and provided, on request, in the reporting deliverables. The objective being to have, within a very short period of time, management tools that take account of the expected SCR levels: "We are now practically ready to manage portfolios under SCR constraints", declares Olivier Bibiano.
Emir and Fatca, new projects in the pipeline
But Solvency II is far from being the only project in the pipeline. From January 2013, pursuant to the Emir regulation, OTC derivatives will have to be cleared through central counterparties. However, "its impact has not yet been closely analysed by the majority of asset managers", warns Omar Safi, Director-Consulting at Deloitte, with responsibility for financial institutions. In this area, however, some asset management companies are ahead of the curve, anticipating a clearing house bottleneck: "We will be operational this summer", indicates Jean-Robert Hervy, at OFI AM. Finally, asset management companies are starting to turn their thoughts to the US Fatca legislation, but "at this stage, few French companies have anticipated its impact on their IS", notes Thibaut de Lajudie, partner at Ailancy. Even if potentially they will have less impact on business lines, it will still probably be necessary to implement new projects, at a time when volumes of assets under management and margins are coming under pressure.