June 2014

BACK OFFICE VIEW: Launching the data lifeboat

LifeboatIf an outsourcer being 'too big to fail' is not considered a legitimate guarantee by regulators, such as the UK's Financial Conduct Authority (FCA), an important element of resilience risk mitigation is the ability of asset managers to change providers or effect an immediate insource of their data.

Given that resilience risk is likely to become FCA policy in the short term, building a data lifeboat is an issue that all asset managers must consider as a matter of urgency. The FCA’s Thematic Project Findings Report on outsourcing in the asset management industry of November 2013 focused on asset managers having inadequate contingency plans in place to deal with a failure of their service provider (“resilience risk”) and asset managers applying inadequate oversight of their service provider (“oversight risk”).

Asset managers must therefore have a failsafe systems capability that can replicate the data that the outsourcer has, so that if an outsourcer should fail, it can instantly deploy and process this constantly updated, alternative data source. This capability is sometimes referred to as “live archiving”.

The burden of migrating all of an asset manager’s data from one outsource provider to another is immense. A better solution is to replicate that data at a third-party firm, which could then be migrated to the new outsourcer. In this way the incumbent outsourcer could continue to operate in a business-as-usual fashion.

A live archiving feed would make it far easier to move from one outsourcer to another should the outsourcer fall below the service level agreement, or if the outsourcing agreement is approaching renewal, or simply if a better value outsourcing service should become available. With full (and widespread) access to the raw data, the asset manager might also be in a position to question its outsourcer’s fees in certain areas. It would also make the task of an immediate insource far more attractive, should the asset manager wish to do so

Aside from the mitigation of resilience risk, there are significant operational advantages to live archiving.

For asset managers that outsource, retrieving data can be difficult and expensive. Many asset servicers charge by the number of users, so access levels can be limited. Often the asset manager cannot see the underlying database, run queries against the data, interrogate it or conduct data mining. A shadow data source facilitates all of these activities.

A lot of satisfaction can be derived from knowing that everything that the asset manager does is reconciled with the live archive and with the outsourcer. There are also practical advantages. For example, an asset manager could take data in from the live archive to run comparable net asset values as a sanity check against its outsourcer. In an age when the fines for misspricing assets are huge (aside from
the reputational damage done) this capability is significant.

Of course, locating data becomes a simple task. If an asset manager needs to find something in a hurry, it will not have to go
to its outsourcer because it already has access to every single transaction emanating from the outsourcer, up to date as of the previous evening. In summary, live archiving is a low-cost type of insurance policy for asset managers. 

Once an asset manager has reassured the FCA through the creation of its data lifeboat, it will soon discover a wealth of other more subtle operational efficiencies.

Gary Butcher, technical services director, Exact Consultancy Services

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