Asset Managers Face Operational Challenges

Terry Flanagan

Asset management firms and service providers are faced with a deluge of regulations, business line diversification, and data, all of which are impacting operational effectiveness, according to a study by research firm Aite Group.

The study, which was sponsored by SunGard, found three major areas of concern: the impact of business diversification, the need to achieve operational effectiveness, and increased pressure on data as operations strive to meet demands in risk management, reporting and reconciliation.

“The findings point to the progressive convergence of traditional and alternative investment approaches,” Tony Warren, vice president in SunGard’s asset management business, told Markets Media. “Previously long-only asset managers are now investing in more complex instruments. That translates directly onto the impact of daily operations.”

In its research, Aite Group found that registered mutual funds are the most important investment vehicle, a high priority for 62% of asset managers and servicers, followed by institutional separate accounts (46%), commingled vehicles such as unit trusts (39%) and hedge funds (39%).

Although equities and fixed income remain the most important asset classes, OTC derivatives are steadily gaining in popularity. By 2016, firms anticipate the biggest increases to take place in cleared derivatives (63%), equities (62%), fixed income (53%) and OTC derivatives (52%).

“Both asset managers and service providers are facing almost unprecedented levels of pressure and complexity to grow the business,” Warren said.

The increased use of OTC derivatives represents a huge hit on operations, as counterparties need to manage increased collateral requirements, moving collateral management from a passive post-trade activity to a front-office optimization strategy.

This has resulted in “a merging of traditional middle and back office operations,” Warren said. “Because of the need to satisfy data requirements and regulations, you can’t really have this lack of integration between data sources because of the need to aggregate.”

Asset management firms are exploring alternative methods of deploying technology, according to the research. Opinions are divided over externally hosted cloud environments, where infrastructure is outsourced to a specialist provider. Firms will apply cloud deployments to disparate functions, rather than the entire enterprise.

Overall, 56% of asset managers outsource back-office functions, including accounting, reporting and custody, and 30% outsource middle-office functions such as reconciliation, investment performance and collateral management. The market seems unsure about whether to outsource corporate actions, collateral management, OTC derivatives processing and valuation, as increased regulatory scrutiny make these areas of high reputational and financial risk.

Although regulatory and client reporting requirements are driving the need for better risk analytics, only a small minority of asset managers and servicers (17%) have an integrated fund accounting and financial reporting platform that supports both traditional and alternative funds.

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