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Magazine Issues » November 2014

FUND ADMINISTRATION: The negotiation game

Businessmen at airportWith data forming a greater part of a fund administrator's service, the relationship they have with their data vendors will be of increasing importance to their clients, discovers Nicholas Pratt.

The 2014 Funds Europe survey of third-party administrators highlighted the challenges facing these service providers. In among the recurring concern over rising regulatory requirements, and the eternal struggle with pricing pressure was an issue that the survey’s respondents didn’t mention: the relationship with various market and reference data vendors.

“Market data is essentially a commodity for the fund administration business and without it we wouldn’t be able to produce net asset values,” says Bertrand Malefant, who is global head of data management services at Societe Generale Securities Services (SGSS). “Over the past few years, regulatory requirements have made it necessary to buy additional data. As we are also facing a significant increase in fees, the relationship with market data vendors is of growing importance.”

Requests to review fees occur on a regular basis, says Malefant. “Very often the initial reviews requested by data vendors are considerable and don’t necessarily change the offering or improve the quality. Renegotiating is, therefore, very often essential. 

“Considerable work was carried out with Bloomberg at the end of last year and early this year on exchanging information with our clients and regulators, for example, and enabled us to clarify the situation. Together, we defined a list of the data that we would provide our clients with as part of our service offering.”

In addition to the cost of purchasing market data, Malefant says the contractual terms around the use or distribution of the data can be equally substantial for both the administrators and their clients. To avoid abusing these agreements, Malefant says that SGSS is “increasingly vigilant” regarding any specific client requests requiring the use of market data. 

In reaction to these data issues, the general industry trend is to centralise market data management within a dedicated department, covering all aspects of securities services, such as purchasing, legal and business requirements, says Malefant. “This is the case at SGSS, having anticipated the need a while back, and led to the creation of a dedicated department several years ago.”  

Eric Reichenberg, managing director of valuation services at SS&C GlobeOp, is responsible for managing the firm’s relationships with data vendors and agrees that this has become increasingly important for fund administrators. “Investors and regulators both want more transparency in the valuations process and to know where exactly the data is coming from and that makes the selection of data vendors much more important. It is not good enough to give fund managers just one or two data sources. We want clients to have a choice so we have licensing arrangements with almost all of the market and reference data vendors.”

In terms of cost, Reichenberg believes it is the job of fund administrators to be successful negotiators. For the commoditised data such as end-of-day pricing for listed instruments, this means negotiating bulk deals. Naturally, the bigger the administrator the easier this negotiation is.

But when it comes to pricing data for less liquid instruments, the negotiations are harder and the costs are higher. “In the OTC [over-the-counter] derivatives market there are fewer data suppliers and the costs for that data can be high. That’s a problem for clients that do not want to pay for the data. But if you want to use best-of-breed, you have to pay for it.”

To minimise costs and increase choice, many administrators will look to work with data vendors on a usage basis. “We use data when we need it, as instructed by our clients and we report which data were used by clients without revealing their identities,” says Reichenberg. “It’s an honour system. We ensure that the reporting is accurate so that the data vendors can bill us accordingly and we have the technology to support that model. Some data vendors prefer fixed fees, but that does not work if clients have multiple sourcing options, such as with fixed income pricing data.”

Another pressing issue is data governance, says Reichenberg. Data vendors are looking to impose strict rules to ensure their data is not distributed to third parties for reasons outside of any licensing agreement. 

For example, administrators are able to supply pricing data for the securities that a client may hold to provide a valuations service, however, they are not allowed to provide pricing data for securities that a client does not hold and which they may want to use for research purposes, despite pressure from cost-conscious fund managers looking to circumvent the licensing arrangements.

“Data vendors are now far more concerned about data leakage because it means lost revenue and I understand that,” Reichenberg says. 

“We are not here to impair the data vendors’ business.” 

However, says Reichenberg, data vendors need to recognise that there should be some give and take, especially where managers feel they are being double-charged when looking to reuse the same piece of data. 

“Clients hate that more than anything.” What must be agreed, says Reichenberg, is a fair arrangement that recognises where a fund manager is using the same data in different ways – in the front office for trading purposes but also in the middle office for valuation – which may justify the double charging.

The debate over purchase agreements and licensing arrangements is not limited to fund administrators and their clients. The market and reference data vendors have issues of their own, especially around the acquisition of benchmark-driven data, an area that has grown enormously with the rise in passive investment trends. 

“The number of benchmarks and the complexity in management and licensing of them has created a challenging environment and significant cost for managers and their administrators,” says Mark Schaedel, managing director, information division at Markit, which currently provides benchmark aggregation and data management services and is now considering expanding its services to include cost management as a result of what it sees as the significant costs in the current market.

The benchmark providers are currently unregulated, although many of the largest index providers have signed up to the International Organization of Securities Commissions (Iosco) standards, which were published in June and are expected to form the framework for future EU regulation of this market. In the meantime, Schaedel believes that fund administrators and managers have an opportunity to influence the manner in which benchmarks are made available and establish a common framework for benchmark data acquisition.

“The scale and complexity involved with acquiring and managing benchmark data requires resources and tools not available broadly. 

“There is an opportunity for these resources and tools to be shared and for the interests of fund managers to be better served. We see an opportunity for benchmark providers here as well,” says Schaedel. 

“With Iosco pressures mounting, reform is required. 

“Much of this can be achieved by separating the administration and calculation functions and these could be centralised as well,” comments Schaedel. 

“The key success factor for any utility model is maintaining competitive advantage while removing the burdens of redundant cost. 

“We think benchmark data management is an area that could benefit tremendously from this sort of collaboration.”

Naturally the benchmark providers refute the claim that their costs are too high. 

“FTSE has always strived to simplify and lower costs around benchmark data where possible,” says John White, managing director, content services, FTSE. 

“As the usage and technology in the sector have evolved and become more sophisticated, some associated costs have increased. However there has been a real emphasis on value based pricing and minimising administrative overheads,” he adds. 

“As a business, we aim to keep pricing consistent and fair, through strong partnerships and feedback from our customers.”

The benchmark providers are also defended by Rick Redding, chief executive of the Index Industry Association (IIA). He says that the current tripartite arrangement prevents market abuse and also sets a fair price – separate people trading the underlying individual instruments; the independent index administrators managing the index and the asset managers creating the products or funds. The IIA also has a code of conduct that all its members subscribe to and a big part of that is the separation of the administration and calculation of the index. “If all index administrators subscribed to this, it would save them a lot of the trouble that we have seen with the likes of Libor.”

As for any complaints about the cost of gathering benchmark data, Redding believes that this is mostly a case of managers and their intermediaries merely trying to reduce their expenses rather than creating a fair market or addressing market inefficiency.

“The fees that the index administrators charge are really low compared to the total fees investors pay. 

Furthermore, there is so much competition amongst index administrators out there today that managers are able to play one off against another and reduce the price further.”

And rather than asking for price regulation or lobbying for a standard service model, Redding believes that the different pricing models and licensing arrangements employed by index administrators is actually an advantage for managers. “Managers should be using these different models as a means of negotiating. There are a number of ways to move the levers so perhaps managers should just use that to their advantage rather than reverting to regulation.”

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