The regulatory emphasis on systemic risk in the post-financial crisis capital markets has created a series of back-office data management challenges for investment managers.
Many of the recent regulations ─ N-MFP, Money Market Stress Testing, CPO-PQR, Form PF, AIFMD and the latest enhanced fund reporting proposal from the U.S. Securities and Exchange Commission ─ are designed to give regulators deeper visibility into the risk that asset manager trading and investing activity poses to the broader market.
“Historically, regulators’ approaches were around investor protection: ensuring that the shareholders or investors of a collective investment had the appropriate information to make decisions and to understand their risks and exposure,” Tom Pfister, manager of EMEA market management at Confluence, told Markets Media. “This has fundamentally changed over the past two years from that protectionist stance to the regulators taking a more hands-on and more proactive approach to protecting the capital market as a whole.”
An example is Europe’s Solvency II, which requires insurance companies to gather information not only about the risk and exposures on their own balance sheets, but those of the asset managers to whom they have given mandates.
“There have been a large number of initiatives undertaken to increase the amount of data that's being reported about alternative investments, both in the U.S. and in Europe,” Pfister said. “All of this is so the regulators can collect and assess the true impact to quality and the strength of the market as a whole.”
With regulators committing to increased technology investments to improve their oversight capabilities, asset managers begin putting smarter data management processes in place. “It's data that you never really aggregated before, never sourced before, never asked for before,” Pfister said.
This requires a fundamental shift in data management for reporting purposes. Right now it is reactive,” Pfister said. “It is, ‘There is a new regulation being proposed so I need to do an initial analysis on how this impacts my business and then gap analysis against what I have today and what I need to do to get to where I need to go.’”
Rather than addressing reporting on a piecemeal basis, firms should adopt a holistic approach. “This is the new world,” Pfister said. “Rather than handle these things on a case-by-case, handle them in their entirety. Make an investment to make a shift in strategy so that you are preparing yourself with the flexibility you need to handle tomorrow's requirements even though they might be relatively unknown or unanalyzed yet."
Featured image via Dollar Stock Photo