Relentless regulatory demands are making it hard for asset managers to use the piles of data they have for anything other than compliance. Nicholas Pratt examines how new technology, recruitment and data governance strategies can help.
The beginning of 2014 has seen a succession of industry surveys purporting to show that asset managers are increasingly concerned about data and are struggling to keep up with the demands placed on them by regulatory requirements.
A SunGard survey – The Regulatory Pressure Cooker – suggests that regulatory change is distracting from core business activities and hindering the ability to grow. Meanwhile, Linedata found that regulation is the top concern for 49% of global asset manager respondents, more so than the 47% that cited investment performance. Consequently, data management and compliance systems are reported as key IT priorities.
And there is anecdotal evidence too. “We were in with a client only yesterday [who was concerned] about the extent of their regulatory compliance demands and what they were not able to do as a result,” says Daniel Simpson, managing director and head of enterprise software in Markit’s enterprise data management business.
With returns and fees both reduced as well as budgets, firms are feeling the pressure and looking to revamp their data management practices. “We are in a very interesting phase in terms of data management,” says Mario Mantrisi, chief strategist and research officer at Kneip.
Because of the sheer extent of regulations, many asset managers have addressed them on a one-by-one basis and this has led to a silo approach rather than a focus on cross-regulatory data properties.
The next step will be to look at data holistically – that is, the relationships and commonalities between different regulations and the data required. “The big challenge is to develop a centralised common database which can be used for any regulation. We are seeing a move from certain asset managers but we are still very much in the middle of this move.”
Making such a move is not easy, though. The first complexity is the range of different data types. Some are related to the investor database. Other types are related to the fund itself, such as the fund prospectus. Then there is performance data, corporate actions-related data, and the data related to the underlying assets of a fund and any related risks.
Additional complexity arises from the different levels of granularity involved and the different calculations that must be carried out with the data. “You cannot just say ‘I am building a database’,” says Mantrisi . “You have to think about how to construct it because if you get it wrong, you will create an even bigger problem.”
Recruitment driveOne way investment managers are looking to address the data management problem is to embark on a recruitment drive and appoint specialists to senior positions with responsibility for overseeing data governance projects.
In February 2014, Old Mutual Global Investors (OMGI), the amalgamation of Skandia Investment’s multi manager funds and Old Mutual’s alpha funds that was launched in 2012, appointed Simon Stratford as its chief technology officer.
Stratford, who was previously at investment management consultancy Investit where he led the IT Value Service, will report to chief operating officer Paul Nathan. He will be responsible for directing OMGI’s technology and data roadmaps as well as taking a major role in OMGI’s Target Operating Model project, which aims to fuse together the Old Mutual and Skandia platforms.
The appointment is typical of the personnel changes being made at many asset managers. And it is not just operating platforms that they are expected to fuse together.
“There is often confusion about who owns the data – the IT department or the business,” says Simpson. “They have to work together to solve that question and the CDO [chief data officer] role is a way to address it.”
The CDO will also be expected to bring the front office and operations departments closer. Whereas the front office once boasted much more influence in terms of both decision making and budgets, operations divisions are becoming powerful fiefdoms - one of the few departments that are seeing their technology budgets retained to some degree, says Simpson.
Elsewhere, the position of chief data architect is now more commonplace at the larger asset managers.
“The more progressive organisations are looking at how they can turn all of the regulatory-related data into something of strategic value. They are elevating the role of managing that data and appointing chief data architects that can manage the process from the inception to the reporting of the data and the use of that data by portfolio managers. Making sure that it is consistent and certified all along the way,” says Jeffrey Wallis, managing partner and president of SunGard Consulting Services.
The recruitment drive is also a result of the new way in which asset managers have to engage with regulators, says Wallis. “The idea of outsourcing compliance to a third party as a box-ticking exercise is outdated. Regulators are more focused on the operational resilience of asset managers and are more aggressive about looking further into their operations. This requires much more direct engagement with the regulators and they need staff with the experience and sensitivity to carry out what is now a much more senior role.”
There are also a series of appointments being made at a less senior level but perhaps no less important. Increasingly, the mathematicians that were once employed in the front office to devise quantitative-led investment strategies are now being employed in database development roles, says Mantrisi. “Asset managers are appointing mathematicians to help with the construction of central databases and ensure that they can be built with enough flexibility to cope with future regulatory changes and not just the current compliance load.”
Despite the concern that regulation is restricting the opportunities for investment managers to develop new funds, some opportunities to create new fund types based on this data do exist, says Melvin Jayawardena, a market manager at Confluence, especially if managers focus on the regulatory demands facing their own investors.
For example, insurers are currently gathering data on their investment portfolios to meet the requirements of Solvency II, and they are looking to their investment managers to develop Solvency II-friendly funds they can invest in and make it easier to report that data, says Jayawardena. Meanwhile the same demands are being made by German pension funds that must meet the demands of Versicherungsaufsichtsgesetz (VAG) reporting, whereby they must report the composition of investment funds they hold units in according to a standardised format that encompasses the breakdown of assets as well as the debtor list and special fund notification.
The bulk of the benefits of an effective data governance strategy are internal though.
“The big change is getting more transparency around the data,” says Simpson. “Understand what it is, where it is and where it has come from and who may have changed it during its lifecycle. That is real governance and then the regulatory reporting should just be a by-product.”
In addition to the recruitment drive, there also has to be a new approach to the technology used, one that involves looking more closely at the terms that have shot to the top of the technology zeitgeist. For example, cloud computing can help reduce the burden of data storage, especially with data provided from external sources, as opposed to confidential client data or positions data. Another example is to employ big data techniques used for managing huge amounts of unstructured data, which can also be of use in a regulatory context, says Wallis.
“The traditional way is to take data in multiple forms into enterprise software and then spin it out. It is a very structured approach. But the techniques used for unstructured data can provide important insights and can be applied in areas such as the harmonisation of data in multiple silos and making it consistent.”
And while many of these techniques are relatively unembraced within the compliance world, growing familiarity with the technology and its agile properties will be increasingly important says Wallis. “We know that the regulators are not finished and there will be a change to the requirements so asset managers have to have an infrastructure that allows for those changes.”
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