November 2009

DATA MANAGEMENT: a control issue

Fund managers are said to be creating their own data hubs away from external administrators in order to keep important data at their fingertips. Nick Fitzpatrick finds the rationale for this could extend to fear of litigation...
papers_wind.jpgData management providers say a spike in enquiries from fund managers has followed the Lehman Brothers collapse as organisations seek to keep control of a large array of information needed to support front and back office operations.

Market data, such as pricing for fund valuations, is a key issue (see ‘Independent Pricing’ article in this issue) – but so too are other data relating to anything from counterparty information to corporate actions.

An emerging reason for this spike in demand is said to be the need to retain control of data related to functions that have been outsourced, such as fund administration and accounting.

Losing ownership of data can even lead to managers having to pay outsourcers for data retrieval if service level agreements with their partners do not cover this. Retrieval of years-old data from back-up tapes could be necessary to fight court cases, for example.

Asset managers are realising that retaining their own data in-house – such as through using a vendor’s data management system or self-building a platform – can form part of a risk management strategy to insure against data from outsourced administrators being incorrect, delayed or prematurely destroyed.

Stuart Plane, a director at data management firm Cadis, says: “When an organisation outsources its administration we find there is a data management procurement process that goes hand in hand with it. It is the beginning of a trend towards outsourcing data management – but to not outsource it to the administrator or custodian.”

Vendors hope that the increasing complexity of multi-asset portfolios, different distribution relationships and global investment will stretch internal capabilities and make outsourcing, rather than self-building, more cost effective.

Plane says: “Fund managers have to decide where the line is between what they want to outsource to custodians and administrators, and what they want to keep control of. That line is usually defined around the front office’s core trading system. The back office is the primary thing that is outsourced.”

Data concentration
Back offices, whether outsourced to custodians and administrators or not, are frequently depended on for information relating to front office activities, such as performance and attribution.

Gert Raeves, vice president of business development at GoldenSource, another data management provider, says: “If a manager does its own in-house client reporting then it needs access to the back office data, and that data has to be assessed for discrepancies. Discrepancies might occur between what an internal system shows about a fund’s price, versus what the custodian’s system shows, and this will trigger an exception that may be due to different price sources or because one system does not show that a trade has been reconciled yet.

“Having a data hub would make it easier to concentrate data.”

Corporate action data generated in the back office – perhaps ultimately by a sub-custodian in a far flung country – is also needed by front offices. Thorsten Heissel, a senior vice president at Sungard, a data technology vendor, says: “Corporate actions are a type of static data that is fed from the back office to the front office.

“It would be no good for the fund manager to have late data about corporate actions, such as a share split that causes prices to change.”

But the issue of data management has most critically centred in the past year on pricing. The financial crisis led to difficulties in obtaining prices for complicated instruments.

Martijn Groot, director of market strategy at Asset Control, says: “Asset pricing is the most in-demand service. We have clients that look after many different funds and they have to value all of them – and as liquidity dropped in the crisis, this became much more difficult.

Heissel, at Sungard, says more customers that are outsourcing back offices keep an accounting system in-house for oversight of their fund accountant.

John Legrand, managing director EMEA at Eagle Investment Systems, concurs with this, but he warns: “Some people refer to
an accounting system as data management and this is inaccurate. Many reasons for why the financial industry is suffering the problems it is today is due to a lack of data management and a lack of visibility around underlying data.

“Fund managers need a strategy to interface with their outsourcers and the data they need from them.”

To price funds it is necessary to combine data from multiple sources, including brokers and market makers as well as custodians. But regulatory drivers may require fund managers to show where the data comes from and how many other sources are looked at to arrive at a fair price.

Not all prices are equal. Pricing complex assets and portfolios is well known to have burdened asset managers. GoldenSource has been growing its fund management base and says 25% of its business is now buyside.

Raeves, at GoldenSource, says: “Asia-Pacific is driving this because portfolios there have grown enormously in size and complexity.”

Technology-driven firms like data management providers are responsible for the introduction of the word ‘solution’ into the English language as a synonym for what were once called products or services. To that extent, GoldenSource offers ‘solutions’ for derivatives and fixed income, among others. Essentially it provides a platform for the securities and investment management industry to help clients better manage, store and distribute data company-wide.

Asset Control offers financial data management solutions also, and distinguishes itself by claiming its systems are easier to integrate with a fund manager’s existing systems.

Eagle Investment Systems, which is owned by BNY Mellon, says it services many prominent financial institutions, providing them with web-based tools to integrate and streamline investment processes in support of data management, investment accounting and performance measurement. 

Cadis is another data manager and last year Hermes Fund Managers, a UK asset manager owned by the BT Pension Scheme, appointed it to provide a data platform. The appointment ran parallel to the decision by Hermes to outsource much of its operations to Northern Trust, the custodian bank.

Sungard provides software and processing solutions for sectors including, but beyond, finance and last year bought Paris-based GL Trade, a financial software company with more than 1,600 customers.

Data storage for legal reasons is another pressure for fund managers to retain a means of controlling their data. Steve Kenny, of KPMG’s financial services IT advisory team, says if there is a dispute between an organsiation and client or regulator that results in litigation, it could be necessary to produce relevant data – and courts may not be sympathetic if that data is not produced.

Kenny says: “This issue might relate to transactional data that may have to be retrieved from back-up tapes. If a fund manager has its own system then it will probably be better able to identify and access what documents are needed more quickly and with less effort. Using a third party means you are one step removed and an administrator may not have it in their service level agreement to retrieve this, making it an extra cost.”

He adds: “If you cannot produce the right records in a timely fashion, demonstrating their integrity, a court could make a presumption of guilt. A precedent in the US has already been set for this, and that precedent may well spread to the UK.”

Data retrieval
In May 2006, the SEC, the US financial regulator, filed a civil case against Morgan Stanley & Co for allegedly failing to produce emails and electronic records in a timely manner during the course of investigations relating to an IPO. The case put data storage in the spotlight and related to thousands of relevant emails. Morgan Stanley did not confirm or deny the allegation but reportedly settled the civil dispute for $15m (€9.2m).

“You can imagine that if you have data held with a third party that is subject to discovery then it will be expensive to retrieve if there is no clear policy about how to store, retain or retrieve that data.”

Kenny adds: “On the other hand, if you have got a policy to get rid of data after a justifiable period, this is a possible solution.”

This issue, coupled with data protection that relates to a fund manager’s retail business, makes the issue of data management even more pressing.

EU legislation, which has to be implemented by January 2011, means fund managers would have to inform regulators about breaches in personal data.

Kenny says research indicates the vast amount of breaches do not get reported, meaning there could be a huge increase in cases.

Personal data has to be held for a finite period of time. If a third party makes a breach or fails to destroy data, the fund manager will still be liable – and as Kenny says, who would want to deal with a firm that has breached data protection laws?
“The point is, have asset managers thought about more than just the short-term benefits of outsourcing data management? The longer-term cost could blow the case for outsourcing out of the water.”

©2009 funds europe

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