Heightened demands for data from regulators has meant the past practice of using spreadsheets to collect information is not only outmoded, but could leave a firm exposed to liabilities.
So says Todd Moyer, executive vice president of global business development at Confluence, who argues that data complexity has pushed asset managers to rely on back office technology and systems, which are often not up to the task.
"The days of being able to leverage spreadsheets and databases and meet regulatory requirements are behind us," Moyer says. "There's too much information to handle and there is too much risk."
Moyer tellsMoney Management Executivethat as regulators continue their post-crisis focus on managing systemic risk, fund administrators have to transform the way they handle data. "I think that all firms are taking this very seriously right now and understand that it is something they need to solve for."
How have new regulations changed the job for asset managers?
I was with a large asset manager last week, and we were discussing some of the SEC modernization initiatives and the FORM N-PORT and FORM N-CEN initiatives - these are significant changes for the industry.
They were estimating that they would need to pool data to meet those requirements from over 20 different systems; TA systems, custody systems, accounting systems - really across the asset management firms.
That effort is not really about pooling from traditional back office data, it's really pooling derivative data - data that's more market-facing and systemic in nature - to allow them to meet those regulations.
That alone has created a challenge, and then on top of that, they are being asked to do this faster than ever before. Just a good example of that is the N-PORT proposal, which is indicating a monthly required, 30-day turnaround time.
You put the fact that companies are going to need data from such a large number of new and different systems, not only from their organization but potentially from partners too, together with the speed in which they need to turn it around - these proposals make it nearly impossible to continue to address regulation in more of a manual mode.
You might be using spreadsheets or data bases to maintain this information, but really being able to do that across disparate systems and have databases or systems that aren't traditionally speaking with one another is a real challenge.
It sounds like an expensive problem.
There is increased operational risk and decreased deficiency, which is ultimately leading to an increase in cost.
I read an article recently on some of these proposed SEC changes around its modernization initiative, which really in essence is the extension with what they've already done with the money market fund industry, but they're estimating that over nine hours per filing it will take to manage these requirements and I think they're estimating around $40,000 per fund ongoing cost.
You think about that being a pretty significant change, just within this one set of proposals, to the cost of the overall operations. Obviously if [the regulators] don't put in place an automated solution, the risk and decreased efficiencies also become a huge challenge.
Transparency then is essential?
When you think about transparency, it's types of data, so we're really looking for systemic risk and that's what regulators have been focused on.
The types of data and information all focused around the market - looking for trends or changes in systemic risk as it relates to investments. That's not typically what the back office administrators have been managing within their operations. A lot of it lies outside of the traditional data sets, and so gathering, maintaining and managing that on a regular basis is really causing challenges for them.
Ultimately it comes down to collecting, validating and reporting on this information. And those are the things that we're going to continue to see.
We've seen from our clients that they are really rethinking how data is managed and really, back to the fact that the disparate data silos and multiple databases are just no longer an option.
I think that they're recognizing that, and they're looking to providers in the market to come to the table with a new way of managing this rapid deployment of regulation.
Do you see costs becoming a burden in the short or long-term?
I think in the near term there has been a bit of a pause.
There has been a pause in the adoption of the new rule-making. For a number of items, such as the money market fund reform, which was finalized, there's an adoption period and a pause that regulators themselves can take during the rule implementation. During this pause, the industry is beginning to rethink its data strategy.
They are beginning to look at reuse of information. Questions such as, 'How can I take certain information that I needed for one filing and have that same information for a second filing?'
There has been a much broader ability to say, 'We've come up for air. How do we use this pause before the next onslaught of regulation that's coming with the modernization initiative? And how do we prepare ourselves better?'
What we've seen is there has been a use of point solutions or manual alternatives as Band-Aids as providers have been forced to meet regulations as they've rolled out. I believe right now there's a real opportunity to rethink that strategy and look at it more holistically for the future.
Does a looming interest rate increase have any impact on costs?
While it's obviously affecting the economy, I don't necessarily think in the profitability of certain firms and banks depending on the institution. I think the market as a whole is keen into looking at what's happening in the interest rate environment, what's happening in China and what's happening across the economy.
Specific to regulation however, and their data management process, I don't think it has much of a bearing.
Consider how resources get allocated. I'd say there has been neglect to the back office over the last several years. I think asset managers in general have spent time focusing on the front and middle office. And I think that neglect has gotten to a point where there are very few alternatives left but to automate.
Just looking at the onslaught of things they're now dealing with, this is also a time when firms are looking to not increase costs, but decrease costs and reduce cost across the organization.
We've seen a huge push for cost reduction and this just plays right into that. You can't say that you're going to be able to reduce your costs or your overall cost structure of your asset management firm if you're not managing this data effectively.
Then obviously there are all the risk factors that go along with doing it manually or cobbling together solutions that are not really traditionally meant to speak with one another.
It's really the combination of all those things that have left these firms with very few alternatives but to automate. And that automation could come through an internal build or leveraging a third party provider or some third party data management solution.
Is seeking third party support is the current trend?
It really depends on how you look at data management and how it is handled across the organization.
What Confluence is doing is we are introducing a platform that helps to normalize and centralize the unstructured variable format data. So where you're not used to receiving this unstructured data, we are introducing a platform that enables us to take that unstructured data into the application and reuse it and repurpose it within our Unity platform.
Its aim is to transform and automate the data management and reporting process. Ultimately this will be a platform that will be data and source agnostic, and will provide a tremendous amount of flexibility to the users.
We offer solutions to help meet the needs of the regulatory solutions in the market, whether it's Form PF in the alternative space or CPO-PQR in the commodity pool arena. We have N-SAR, the money market fund reform solution, as well as one for AIFMD, which has been a key topic in Europe over the last 12 to 18 months around the alternative fund directive there, and what they're doing to meet those needs for distribution purposes throughout the EU.
So there's depth and breadth of knowledge and managing data inside of Confluence and this platform that we are introducing is just a reaction for the need in the market that our customers are coming to us with. 'How do we handle this massive amount of data that requires such a quick turnaround time, and the ability to actually use it?' We can disseminate it, we can turn it into an XML schema for SEC reporting, we can not only help firms manage the inbound but the outbound aspects of the data as well.
What was the decision process in creating the Unity platform?
It was driven by our customers. I spend time with at least several customers every week, and I'd say the consistent theme across the board is how do we manage the data process, how do we actually gather the information and put it into a reasonable format. So, we began working with several of our key clients to say, let us help you with that. This is core to what we do as a data management platform already, and we asked, if we extended our capabilities to take in more of this variable format data, would that be something that would be valuable to you? Very clearly we heard a resounding yes.
We've been working diligently over the last 12 to 18 months and enhancing our capabilities to handle the disparate type of data that the market is driving toward.
We're really excited about what that future platform looks like and how it can meet these needs in the marketplace.
While you are still in the midst of finalizing this platform, what has been the overall focus on cost?
We're looking to provide a significant reimbursable launch investment to our customers and we feel that not only can we help mitigate some of the cost burden that's out due to some of these regulatory changes, but ultimately we are looking to do more on a single platform, which is reducing a lot of cost as well.
As you are able to service needs across various types of investments, being able to do that in a single application will reduce cost and risk as well.