In the face of growing reporting requirements, Nicholas Pratt asks whether there is a case for more industry utilities.
The reporting burden for fund managers has never been higher, nor has it been more disparate. From regulatory demands, to information requests from banks, to investors’ transparency requirements; each with their own specifications, no two the same. So perhaps it is time to consider the question of an industry-wide utility to carry some of this burden.
“It would depend on what that utility does,” says Kevin Walsh, chief operating officer of fund administrator Custom House Group. “If there was an industry-wide portal that everyone could use to compare information across fund types, that would be of great benefit.”
The conundrum is that the greatest motivation for such a utility is also really its greatest obstacle: the sheer divergence in fund types.
Walsh says that there have been similar initiatives attempted before, such as the Sharp project, a project led by Swift to create a standardised messaging protocol for hedge funds to communicate on an automated basis. And while a level of consistency was reached and a protocol agreed, it was never implemented on a meaningful scale.
“For a utility project to work on an industry-wide basis, it is down to the end users to adopt it,” says Walsh. “But this seldom happens because of the practical differences in the hedge fund world in terms of fund types and investor demands. Some investors will want to see more than others.”
And what of the fund administrators? Would any utility for investor reporting infringe on their own ambitions to offer revenue-generating reporting services to their own clients? “There is a merit to any utility that will reduce administrators’ costs,” says Walsh.
All fund administrators have web portals for investors and managers but they typically have different portals for different fund types, whether private equity, or fund of funds, for example. And it is a typical complaint from clients that they have to access different portals. An independent and centralised utility that could solve that consolidation challenge would be welcomed by administrators and investors alike, says Walsh.
Ideally, it would be an investor-led project and underpinned by a service provider with a compelling product that was suitably independent, all of which is easier said than done.
“There is certainly an appetite for such a centralised utility but it would have to be done correctly and that would be difficult,” suggests Walsh.
Some do not see an industry utility for investor reporting as a pressing concern among managers. “Managers see reporting as a way to differentiate themselves and are looking for people who can help them to not only meet their regulatory requirements but also use that data to create extra benefits,” says Maria Cantillon, global head of sales for State Street’s alternative investment solutions business. “If they get any generic information back from an industry utility, I don’t know how much use that information would be.”
Rather than clamour for a utility, Cantillon says that managers look to their fund administrators to provide data management as part of their service.
“I see managers needing their existing service provider to extend their services so they can aid in this industry dilemma.”
State Street, like other large fund administrators, has developed a suite of services around aiding managers’ investor-led transparency needs and regulatory reporting. “We like to think of ourselves as a service provider operating right across the reporting chain. Managers are living in a very competitive world and so equipping them with the right tools may give them a competitive advantage.”
Cantillon explains a utility may be hard to establish in the fund and hedge fund sector where achieving standardisation has been thus far very difficult, especially for regulatory reporting. While welcoming greater standardisation in the fund and hedge fund sector, Cantillon is unsure what would be suitable for an industry-wide utility given the divergence that exists. She points out that existing utilities, such as Swift or the US-based Depository Trust and Clearing Corporation (DTCC), are designed for commodity tasks like moving money around the world or clearing trades. But to create something similar to satisfy other regulatory demands, like the Alternative Investment Fund Managers Directive (AIFMD), could be impractical.
SO MANY INITIATIVES
“Sending standardised answers to questions about strategy would be too hard to harmonise. No two answers may be the same,” says Cantillon. Mario Mantrisi, chief strategy and research officer at Kneip, a Luxembourg-based service for fund managers’ reporting requirements, points to FundsXML, a pan-European data protocol for the electronic exchange of funds-related information, and the Fund Platform Group, which aims to brings more standards to fund distribution, as similar efforts to bring industry-wide standards.
There are also the Open Protocol Enabling Risk Aggregation standards for risk reporting. However, it is the existence of so many initiatives that can often be the problem, says Mantrisi, especially where they are competing to solve the same type of issue.
“We see lots of standards used within the industry and everyone thinks their one is the best. And the hedge fund industry is dynamic meaning that a standard cannot remain unchanged for very long. There are new concepts, strategies and instruments on a regular basis and it is a job to keep the standards all up to date.”
Mantrisi says that an industry-wide utility would be well received in the industry but concedes that it is one thing to welcome it and another thing to work on it.
But he is hopeful that progress can be made provided that any initiative is based on open standards and clear, non-commercial governance. And now that regulations like the AIFMD have at last been put into effect, supervisors may actually turn their attention to the quality of reporting and how it can be made more efficient.
And if the regulators and the main players in the industry start to consider standardisation more seriously, perhaps an industry-wide utility for some elements of reporting may not be so outlandish an idea after all.
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