How to generate regulatory alpha

The recent swathe of regulation has meant that managers face an incredible drain on internal resources, leading to increased headcount, increased operating costs, and distraction from core competencies.

To overcome this, ConceptONE and Maples Fund Services, a division of MaplesFS, recommend a robust Regulatory Enterprise Risk Management (`RegERM') system to ease the burden on managers. This integrated approach builds efficiency into reporting workflows and populates myriad filings, from Annex IV to Form PF, CPO-PQR, EMIR, with accurate data. Drawing on their collective experience, the firms have co-authored a white paper entitled, "Achieving Regulatory Alpha through Regulatory Enterprise Risk Management", where a number of considerations are presented as to how RegERM offers a clear path to make reporting more predictable and streamlined.

"By implementing a robust RegERM strategy, institutions of all sizes can benefit from accurate and timely compliance to regulatory reporting as well as significant synergies with existing operational processes including creating increased flexibility and economies of scale in portfolio analytics, due diligence processes, and client reporting," the paper notes.

Mark Weir (pictured), Maples Fund Services' Senior Vice President responsible for middle office operations and one of the paper's core authors, notes a number of important observations in the marketplace. "The current regulatory environment has managers grappling with a growing number of new regulations," says Weir. "This is creating a sense of regulatory fatigue syndrome whereby managers may be unconsciously exposing themselves to risks of non-compliance.

"Managers have also come to realise that not complying with the regulatory environment is a specific risk to the portfolio. By putting a solid operational infrastructure in place, managers can ensure that they are in full compliance with global regulation and that their integrated regulatory reporting system can act as a hedge against reputation risk and/or financial penalties."

Effectively hedging the risk of regulatory reporting and compliance requires three key elements, says Weir: data and reporting experts, purpose-built technology and comprehensive advisory services. Individually, there are plenty of third party offerings but few that combine all three. 

Furthermore, Maples Fund Services has the benefit of being able to leverage the expertise of Maples and Calder, a leading law firm that also sits within the Maples group. "Where the opportunity has presented itself, we've actively tried to participate in the shaping of regulation," explains Jason Brandt, Maples Fund Services' Regional Head of Fund Services – North America. 

Having these elements in place can generate the "regulatory alpha" noted in the white paper; on the one hand, it is a hedge to guard against non-compliance. On the other hand, it is a way for managers to circumvent cost expenditure that arises from building in-house systems that might, ultimately, fail. 

"One recent industry survey showed that 15 percent of hedge fund employees, on average, are compliance professionals. That doesn't even take into account IT and data management staff. There is a way for managers to circumvent this trend, and that's by appointing an outsourced service provider to deliver a comprehensive solution," concludes Weir.

By implementing a robust RegERM strategy, institutions of all sizes can benefit from accurate and timely compliance to regulatory reporting as well as significant synergies with existing operational processes. 

To read the white paper in full, please click here

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