By James Williams – Seemingly overnight fund administrators have had to deal with the complexities of enhanced regulation at a level never before seen in the industry. In Europe, this has taken root in the form of the AIFM Directive, introduced this July.
Next year, swap regulation under EMIR will follow the lead of the Dodd-Frank Act in the US. On the horizon looms FATCA, a potentially huge operational burden for administrators who will need to automate their investor onboarding process, not to mention the current need to support managers’ Form PF filings to the SEC.
At the heart of this issue is data. Not merely the volume of data that administrators must now deal with, but the quality of that data, its accuracy, and how it can be properly utilised to keep on top of compliance management and provide accurate risk-free reporting to clients.
Advent Software is well aware of these complexities. As an industry leader in the field of data management – one of the firm’s core tenets – it is well placed to provide a series of solutions, most notably through its Advent Geneva accounting engine. But as Martin Sreba (pictured), Senior Director, Global Solutions Management & Sales, explains, being an expert in data management is not enough today.
“The workflow component is just as important. What we’ve done is develop a framework that ties data and workflow management together with all of our solutions. That was the driver behind our new infrastructure, Advent Direct, which we’ve created in collaboration with industry experts across the technology and financial services industries.”
This is especially good news for depositories who, like the fund administrators, face huge demands from a data management perspective under the AIFM Directive. This is tied to the fact that a chosen depository will be required under the Directive to perform three core tasks: safekeeping of assets of an Alternative Investment Fund (AIF), cash monitoring, and general operational oversight of the AIF.
Advent Direct – A new integrated framework
Having reliable data that has been fully normalised to carry out these functions, and which will form a key tenet of a depository’s compliance workflow process, has never been more important.
Equally, without the right data coming from prime brokers and custodians, fund administrators run the risk of falling foul of regulatory demands when it comes to the third component of the AIFM Directive: namely, regulatory reporting.
“Advent Direct creates a framework that brings the three key tenets – data management, workflow management and reporting – together. This is not about responding to one piece of regulation. Regardless of what the regulation is, we have to be able to anticipate what changes might occur in the future.
“That’s what this new framework is. Advent Direct will be our enabler to handle anything coming down the pipe,” explains Sreba.
The role of any technology vendor like Advent is to ensure that the data set is correct. This is what its clients depend on as they are the ones who face new roles and responsibilities under the Directive – without the ability to access and utilise data the right way, custodians and fund administrators expose themselves to regulatory risk.
In the US, Advent has already been busy ramping up its data acquisition capability, referred to as Advent Custodial Data, by connecting to hundreds of brokers and custodians. These data feeds, in conjunction with its own internal systems, are providing its clients with the data they need to support their own clients. And Advent Direct is providing the crucial integrated framework.
“The key component of data management as we see it is the ability to normalise the data that all downstream systems could understand. The Advent Direct framework supports data coming from both internal systems and external systems used by banks and custodians, and normalises it.
“We are now busy building out this capability for the European market where clients will be able to leverage the data for whatever their needs. What we’ve done is help streamline the data management process,” comments Martin Engdal, Market Strategist and Director of Solutions Marketing at Advent.
This is, of course, an ongoing process. Connecting up to multiple systems for hundreds of European clients will take time, but the train is in motion.
Within Advent Direct, this data management component forms the bedrock on which fund administrators, custodians etc will be able to evolve their operational set-up to better cope with the unique demands that regulation now places on them.
“We are experts in data normalisation. We understand the complexities of AIFMD and we now have the framework in place with Advent Direct to build out the network globally,” adds Sreba.
The key step forward that Advent has made is the ability to step back, take a fully objective view of the complexities facing industry players under the AIFM Directive, and build a solution that supports not just data acquisition, but, crucially, data enrichment.
“The data coming from our systems will be enriched with information on notional values, fees, position-level exposures etc, that are required under the Directive. That’s a key aspect of data management.
“If someone has Geneva in-house, our system will enable that client to easily access that data. We developed the software to be as complex as possible to handle the needs of the front- through back-office,” explains Sreba.
As for why data needs to be enriched in the first place essentially boils down to the fact that the industry has progressed so fast in recent years that many of the old custody systems that lie within banks simply aren’t equipped to handle the added complexity.
“A lot of these systems don’t have the requisite data under the new regulatory regime,” adds Jesper Steiness, Director of Sales EMEA at Advent. “Hence the need to enrich it. By bringing everything in to one framework Advent Direct enables clients to enhance the data management process by getting enriched data from our systems, which they can then use to create a complete data set to meet their regulatory filing needs.”
Regulation pushing the technology envelope
One of the indirect consequences of regulation is technology innovation.
“The front office systems have always been ahead of the curve to handle complex derivatives, forecasting, valuations etc. The complexity required for today’s regulatory filings is pushing this front office technology further and further into the middle and back office where we sit with Geneva,” says Engdal. “We see ourselves becoming more closely aligned to front office systems tracking notional values and exposures across all instrument types. This is an example of how firms need the latest technology and capabilities to allow them to meet the various regulatory requirements like AIFMD. Adoption of new solutions to tackle these requirements will also have wider benefits of reducing both operational and reputational risk”
The process of data acquisition, normalisation, and enrichment to detailed filing (which will be different in each country) is very complex. Advent play a key role in this process and areas that are not fully covered are dealt with by partnering up with the right specialists to enhance the power of Advent Direct has been of strategic importance. This can best be illustrated by taking into consideration the fact that there remain a lot of unknowns as to how individual EU Member States will implement the AIFM Directive. In all likelihood, fund administrators will need to ensure that they have the ability to provide reporting services to their clients in the local language of each market in which funds are passported.
“There are experts who focus on regulatory filing for UCITS, 40 ACT funds, Form PF etc. That’s their core business and they’ve been doing it for many years. We are reaching out to these firms to create a relationship to facilitate the filing process. What they will do is produce those reports for the client in the correct format, for the specific jurisdiction, using the data from Advent Direct,” says Sreba.
“The more we can pre-empt those requests by the regulators the faster we can support our clients.”
This illustrates clearly how the framework effectively acts as a conduit, connecting myriad different counterparties, systems and workflows to facilitate the final output; in this case, a regulatory report in the correct language. It’s a simple plug and play approach that different partners will be able to utilise.
Workflow management and data management are both part of the same story. Both are completely dependent on clean, normalised data.
For depositories, the concept of monitoring and tracking various steps in a daily trade or process is a key tenant in a lot of today’s regulatory regimes, as is cash management. This requires customised workflows and internal processes that give depositories as clear a picture as possible on the status of the data they are monitoring.
In other words, owning the data is only half the story. The other half is having the confidence that the status of the data is such that when it is released it has been enriched, approved, and has not hit any limits or thresholds as defined by compliance management.
“We are building technology, right now, to plug into Advent Direct to provide a compliance function under AIFMD. That compliance function will enable us to customise any workflow as pertains to cash monitoring and general oversight,” says Sreba.
“By having a customised toolkit, for example, it will allow the depository to add multiple steps to a daily NAV process, monitor the state of a fund, its cash reconciliations, have there been any modifications to corporate actions? This high level of customisation is being incorporated into the new compliance module.”
Getting the right workflows in place to adhere with compliance is a critical element for depositories. Whilst many will already be familiar with the monitoring and safekeeping aspects, given that they are part of universal banks with separate custodial, prime brokerage and fund administration arms, the fact that each appointed depository will be on the hook for any liabilities incurred by an AIF on their watch means that having robust controls and limits in place will be vital.
It’s all about controlling the data and having transparency and knowing where information has been or is headed.
As such, depositories are being careful about who they partner up with.
“We’ve partnered with a number of large firms to build out compliance functions that will allow us to customise workflows and allow us to monitor these different regulatory requirements that a depository will need,” says Engdal.
“You can’t make a mistake on thresholds if you claim to be a depository. From our perspective, with Advent Direct, the ability to plug in various workflows from various systems – not necessarily all ours – in to one control set that will monitor a firm’s entire workflow process is a compelling one.”
The cash monitoring role of depositories under AIFMD is both logical and understandable given the risks and liabilities that they must assume. Mitigating risk lies at the heart of the matter; the better the workflow management, by knowing the state of each process, the less likely mistakes will be made when performing the cash monitoring and general oversight function of a fund’s activities.
Sreba points out that the fear among depositories is that, currently, their internal processes simply aren’t robust enough to deal with regulation. They understand the need to replace them with new controls and processes that tie all the information together to present a more holistic view of where they stand.
“They need to be sure that the risk is low enough to release the data and that they can stand by the numbers. A lot of depositories right now simply don’t have the internal controls. Many have built internal processes piecemeal over a number of years and aren’t able to tie everything together.
“We see that. We understand these issues. That’s why we’ve built a framework that can tie all this together through Advent Direct.”
As Steiness concludes, the framework’s creation was not simply a knee-jerk reaction to regulation: “It has been driven by client demand as well as regulatory change. Our clients need to add value and we need to add value to them. Due to the size of our client base, we need to be best-in-class. With Advent Direct, we can now support them across the three core tenets of data management, workflow management and reporting.”